On Study Of Foreign Direct Investment And Tax Policy Under Ambiguity

If a foreign company faces with the problem of exporting products, or entering the market by undertaking the foreign direct investment (FDI), then it is often difficult to predict the economic and political environment of an in-vested country. Thus, the foreign firms that aim to enter foreign markets are faced with more uncertainty about the prospect of foreign markets. It will have a significant impact on the investment decisions, so we introduce Knightian uncertainty into the model. On the other hand, through the analysis of the eco-nomic situation, we can find that both inflation and fluctuations of exchange rate also impact on FDI and tax policy. To this end, we will get a more mean-ingful investment model by considering ambiguity, fluctuations of exchange rate and inflation on FDI and tax policy, respectively.This thesis studies FDI problems by a foreign firm with inflation and two kinds of fluctuations of exchange rate under ambiguity. In Chapter2, we study the problems of foreign direct investment with inflation under ambiguity. First, we derive the dynamics of the evolution of the GDP level by using I to formula. Second, combining with the corporate tax needed to pay when the company makes transnational investment decisions, we give the value of FDI. Under maximizing the value of the foreign direct investment, we analyze the optimal timing of FDI (irreversible). Then through the solution of HJB equation, we derive the optimal GDP level of switching from exporting to FDI under ambi-guity. Finally, we carry on the numerical analysis and quantitatively analyze the influence of inflation on the company’s foreign direct investment strategy.In Chapter3, the problems of the foreign direct investment with fluctua-tions of the exchange rate in a random situation under ambiguity are studied. By using the above derivation we obtain the optimal GDP level of switching from exporting to FDI under ambiguity, and derive the optimal tax policy by the host country. We also discuss the optimal GDP level, the government’s profit and the firm’s profit in cooperative game and non-cooperative game, re-spectively. Then we analyze the influence of ambiguity and fluctuations of exchange rate on the company’s foreign direct investment strategy in the co-operative game and non-cooperative game, respectively.The Chapter4shows us that fluctuations of exchange rate are assumed to obey a mean reverting process. We use the above method derives the optimal GDP level of FDI, and analyze the influence of ambiguity, exchange rate, re-version parameter on FDI, respectively. The results show that compared with fluctuations of exchange rate in random situation, foreign companies’s deci-sion is largely affected by the host country government intervention. Thus the firms will pay more attention to the host country’s macro-control policies, and determine the optimal time to enter the host country market in order to gain more profits.