Attracting Fdi in a Politically Risky World†

  1. Eckhard Janeba*

Article first published online: 16 JAN 2003

DOI: 10.1111/1468-2354.t01-1-00051

Issue

International Economic Review

International Economic Review

Volume 43, Issue 4, pages 1127–1155, November 2002

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How to Cite

Janeba, E. (2002), Attracting Fdi in a Politically Risky World. International Economic Review, 43: 1127–1155. doi: 10.1111/1468-2354.t01-1-00051

Author Information

*1Most of the research for this paper was done while I was at Indiana University. I am grateful to Michael Baye, Anthony Creane, Bill Hoyt, Susanne Janeba, Eric Rasmussen, Greg Shaffer, and Jay Wilson for very helpful comments on an earlier draft. Several referees made valuable comments that improved the paper in many ways. Any errors are mine. Please address correspondence to: Eckhard Janeba, Department of Economics, University of Colorado, Boulder, CO 80309-0256, USA; tel: (303) 492-5923; fax: (303) 492-8960. E-mail: Eckhard.Janeba@colorado.edu.

  1. †

    *Manuscript submitted August 1998, final version submitted December 2000.

Publication History

  1. Issue published online: 16 JAN 2003
  2. Article first published online: 16 JAN 2003

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Conventional wisdom holds that lack of government commitment deters foreign investment in developing countries. Yet this explanation is not convincing because some econometric studies have found little support for the role of political risk and host governments can offer upfront subsidies that compensate foreign investors for their sunk cost. This paper shows that a second commitment problem upsets the argument. A multinational firm cannot credibly commit to invest in only one country. Since countries differ in production costs and government credibility, this article explains the pattern of investment in a politically risky world.

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