Quarterly Review 1612

Direct Investment: A Doubtful Alternative to International Debt

Harold L. Cole
William B. English

Winter 1992

The paper considers a model in which private foreign investors make direct long-lived capital investments in a small developing country that is subject to stochastic shocks to production. Depending upon the preferences of the host country, we find that expropriation can occur because of either desperation or opportunism. We show that under reasonable assumptions, increased investment makes expropriation less likely to occur and that the level of investment chosen by atomistic foreign investors may be nonoptimal.

Reprinted From: Journal of International Economics (Vol. 30, No. 3-4, May 1991, pp. 201-227)

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