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.

, , ,,
Oxford Bulletin of Economics and Statistics
Erasmus Research Institute of Management

Pennings, E., & 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