TITLE:
Counter Cowbell Effect in a Stochastic Market: Does Subsidy Really Induce Foreign Direct Investment?
AUTHORS:
Yasunori Fujita
KEYWORDS:
Counter Cowbell Effect, Foreign Direct Investment, Optimal Stopping Theory, Value of Waiting
JOURNAL NAME:
Modern Economy,
Vol.9 No.4,
April
27,
2018
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.