The Effects of Policy Uncertainty on the Choice and Timing of Foreign Direct Investment : An Exploratory Firm-Level Assessment
Foreign investors tend to be skeptical about the durability of economic reforms being undertaken in a number of developing countries on the one hand, and physical capital is partly or fully irreversible on the other. As such, even if investors are risk-neutral, they tend to favor a ‘wait-and-see’ attitude in the early stages of the reforms. This paper is an exploratory attempt at providing a simple unifying framework that makes explicit and clarifies thinking on the inter-linkages between policy uncertainty, option value and the choice and timing of FDI at the firm-level. The model is used as the basis for the derivation of a generalized reduced form relationship between FDI at a micro-level and its influencing variables.