Page 13 - Azerbaijan State University of Economics

Salah Salimian, Mahdi Movahedi Beknazar, Kiumars Shahbazi, Zahra Khalilzadeh Silabi: The Role
of Investment in the Equilibrium of International Political Economy (Game Theory Approach)

Assume that the utility function of the investors is defined as follows:

2 1
= (1)

1+
Where is the investor's utility function, , the return in the local market, , the

return in the foreign market, , the risk of local market and is the risk of foreign

market. This function indicates that an increase in the return of capital in the local
market leads to increased utility of investors. Moreover, increased risk in the foreign
market leads to decreased utility of the investor; however, the effects of returns for
the investor in this function are more than the effects of foreign risk. The expression
1
is the probability of no investment in foreign market. This provability decreases
1+
with an increase in the risk of local market and increased return of foreign market. In
other words, in the case of an increase in the risk of local market or the return on
investment in the foreign market, this probability would decrease so that the capital
remains in the country (there is no outflow).

On the other hand, the utility function of the countries is defined as follows:

1 2
= − 0 < ≤ 1 و 0 ≤ ρ ≤ 1 (2)

2
In this function, is the utility of countries, is the return in the local market, is

the return in the foreign market, is the risk in the local market and is the risk in

the foreign market. This function shows that the risk and local return is more important
for countries than the risk and return in other markets (foreign). The important point
in this function is about and that is defined as follows:

is the economic power of countries and in the 0-1 range. If = 1, then the country
2

is in the highest economic stage and the importance of the capital will be . The
2
lower stage is ℎ value, then, the country is economically in a lower economic
phase and the significance of the capital for it will be 2 . In other words, the
2
significance of keeping the capital inside the country will be more for it. Moreover,
2

the comparison of and indicates that the priority of countries is to preserve
2
capital in the local market.

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