Multinational Firm Behaviour under Country Risk In the riskiest Countries

This paper investigates the nature of the relationship between direct investment and country risk in southern countries, especially developing countries (vertical investment). Using a theoretical model, we show that a necessary condition exists and is sufficient for business risk to determine the entrepreneur's strategy to undertake an investment project if the mover-owner advantage exists in a country with risk. A Multinational Enterprise can invest in a big number of countries if the gains from invest are higher than country risk cost. The proposed model can be seen as an extension of Lehmann (1999) and Markusen (2004). This model makes the hypothesis that the MNE can only invest under a necessary and sufficient condition to achieve this investment project. This only choice is the condition of investment. The extension of this model is to illustrate under what conditions, a MNE will establish a foreign subsidiary in a risky world. The firm confronts itself to a choice between the investment opportunities and the risk in developing countries.