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Counter Cowbell Effect in a Stochastic Market: Does Subsidy Really Induce Foreign Direct Investment?
Keio University, Tokyo, Japan
- 1 Keio University, Tokyo, Japan
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Abstract
In the present paper, we examine if the “cowbell” attracts foreign direct investment, i.e. , if the investment-attracting subsidy really induces foreign direct investment. The framework we construct is an international trade model where one firm intends a foreign direct investment under uncertainty that is expressed by geometric Brownian motion. It is revealed that contrary to the intention of the government of the host country, the cowbell does not work, that is, the investment-attracting subsidy postpones the optimal timing of foreign direct investment.
KeywordsCounter Cowbell EffectForeign Direct InvestmentOptimal Stopping TheoryValue of Waiting
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