A simple model of corporate international investment under incomplete information and taxes
- First Online:
- 128 Downloads
This paper extends the theory of corporate international investment in Choi (J. Int. Bus. Stud. 20: 145–155, 1989) in an environment where the segmentation of international capital markets for investors or the presence of agency costs provide some independence to corporate decisions. The model shows that the real exchange risk, the competition between firms in different markets and diversification gains affect corporate international investment.
By accounting for the role of information as defined in the models of Merton (J. Finance 42: 483–510, 1987), Bellalah (Int. J. Finance Econ. 6: 59–67, 2001a) and Bellalah and Wu (Int. J. Theor. Appl. Finance 5(5): 479–495, 2002), the model embodies different existing explanations based on economic and behavioral variables. We show in a “two-country” firm model that real exchange risk, diversification motives and information costs are important elements in the determination of corporate international investment decisions. The dynamic portfolio model reflects the main results in several theories of foreign direct investment. Our model accounts for the role of information in explaining foreign investments. It provides simple explanations which are useful in explaining the home bias puzzle in international finance.
Using the dynamical programming principle method, we provide the general solution for the proportion of firm’s total capital budget. We also use a new method to get explicit solutions in some special cases. This new method can be applied to solve other financial control problems. The simulating results are given to show our conclusion and the influence of some parameters to the optimal solution. The economic results can be seen as a generalization of the model in Solnik (J. Econ. Theory 8: 500–524, 1974).
KeywordsCorporate international investment Incomplete information Dynamical programming principle
Unable to display preview. Download preview PDF.
- Aliber, R. (1970). A theory of foreign direct investment. C. P. Kindleberger (Ed.), The international corporation. Cambridge: MIT Press. Google Scholar
- Aliber, R. (1983). Money, multinationals and sovereigns. C. P. Kindleberger & D. Audretsch (Eds.), The multinational corporation in the 1980s. Cambridge: MIT Press. Google Scholar
- Bellalah, M. (1990). Quatres essais sur l’évaluation des options: dividendes, volatilités des taux d’intérêt et information incomplète. Doctorat de l’Université de Paris-Dauphine (June). Google Scholar
- Bellalah, M. (2001b). Market imperfections, information costs and the valuation of derivatives: some general results. International Journal of Finance, 13, 1895–1928. Google Scholar
- Bellalah, M., & Jacquillat, B. (1995). Option valuation with information costs: theory and tests. Financial Review, August, 617–635. Google Scholar
- Coval, J., & Moskowitz, T. F. (1999). Home bias at home: local equity preference in domestic portfolios. Working paper, University of Michigan. Google Scholar
- Dornbusch, R. (1980). Exchange rate risk and the macroeconomics of exchange rate determination. NBER Working paper, No. 493, June. Google Scholar
- Karatzas, I., & Shreve, S. E. (1988). Brownian motion and stochastic calculus. New York: Springer. Google Scholar
- Stulz, R. (1999). Globalization of equity markets and the cost of capital. Working paper, February. Google Scholar
- Yong, J., & Zhou, X. (1999). Stochastic controls: Hamiltonian systems and HJB equations. New York: Springer. Google Scholar