Why FDI Transaction Prices Vary

Abstract

Adapting the logic of transaction cost economics (TCE), we argue that the source of transaction safeguards (i.e., foreign investor or host government) interacts with country-level uncertainty to determine the price investors pay for foreign direct investments (FDI) in strategic sectors. We find that the marginal effect of protective transaction safeguards on FDI price varies in surprising ways across the level of uncertainty. When the government installs beneficial safeguards, the marginal effect on FDI price is positive, and this positive effect decreases as country-level uncertainty increases. When investors install their own safeguards and thus bear the costs of protection, the marginal effect on the acquisition price of the FDI transaction is negative, and this negative effect decreases with increases in country-level uncertainty. Using novel data on 332 FDI transactions in the telecommunications services sector of 77 emerging markets, we employ multilevel analysis to manage the clustered and interactive nature of the data.