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A note on political risk and the required return on foreign direct investment

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  • Kirt C Butler

    (Michigan State University)

  • Domingo Castelo Joaquin

    (Illinois State University)

Abstract

This note analyzes the impact of political risk on investors' required return and the multinational corporation's cost of capital on foreign direct investment using the basic diversifiable-nondiversifiable dichotomy of portfolio theory. Whether or not a particular political risk affects the value of a multinational corporation through its cost of capital depends on whether the risk is related to investors' relevant market portfolios. We provide a numerical example that illustrates the potential impact of political risk on required return.© 1998 JIBS. Journal of International Business Studies (1998) 29, 599–607

Suggested Citation

  • Kirt C Butler & Domingo Castelo Joaquin, 1998. "A note on political risk and the required return on foreign direct investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 29(3), pages 599-607, September.
    • Handle: RePEc:pal:jintbs:v:29:y:1998:i:3:p:599-607
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