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.
This is a revised version of a paper published in the _Journal of International Economics_ (May 1991, vol. 30, no. 3-4, pp. 201-27): "Expropriation and Direct Investment" by Harold L. Cole and William B. English. The paper appears here with the permission of Elsevier Science Publishers B.V. (North-Holland). © All rights reserved. https://doi.org/10.1016/0022-1996(91)90019-3