DP4801 | The Hazard Rate of Foreign Direct Investment in Transition Countries: A Direct Estimation of a Real Option Model

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23/12/2004

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Abstract

The hazard rate of investment is derived within a real option model, and its properties are analysed in order to directly study the relation between uncertainty and investment. Maximum likelihood estimates of the hazard are calculated using a sample of MNEs that have invested in Central and Eastern Europe over the period 1990-98. Employing a standard, parametric specification of the hazard, our measure of uncertainty has a negative effect on investment, but the model is unable to control for non-linearities in the relationship. The option-based hazard shows the importance of non-linearities and exhibits a significant value of waiting, though it is independent of our measure of uncertainty. This finding supports the existence of alternative channels through which uncertainty can affect investment.