The hazard rate of investment is derived within a real-option model, and its properties are analysed so as to directly study the relation between uncertainty and investment. Maximum likelihood estimates of the hazard are calculated using a sample of multinational enterprises (MNEs) that invested in Central and Eastern Europe over the period 1990–98. Employing a standard, non-parametric specification of the hazard, our measure of uncertainty has a negative effect on investment, but the reduced-form model is unable to control for nonlinearities in the relationship. The structural estimation of the option-based hazard is instead able to account for the nonlinearities and exhibits a significant value of waiting, although the latter is independent of our measure of uncertainty. This finding supports the existence of alternative channels through which uncertainty can affect investment.

Additional Metadata
Keywords FDI, MNEs, foreign direct investment, hazard rates
Persistent URL dx.doi.org/10.1111/j.1468-0084.2006.00178.x, hdl.handle.net/1765/12066
Journal Oxford Bulletin of Economics and Statistics
Citation
Pennings, H.P.G, & Altomonte, C. (2006). The Hazard Rate of Foreign Direct Investment: A Structural Estimation of a Real Option Model. Oxford Bulletin of Economics and Statistics, 68(5), 569–593. doi:10.1111/j.1468-0084.2006.00178.x