We consider a model that provides insight into the
well-known Folk theorem in economics that when the discount
factor β is sufficiently close to 1, expropriation will
never occur. Although this Folk theorem is true in our model,
our perspective is different. The discount factor β often
is described as a “deep structural parameter” that is difficult
to alter at a point in time. In contrast, we analyze the
determinants of two thresholds β and β*
that segment the unit interval on which β is defined into three
subintervals. These subintervals correspond to the three possible
equilibria for investment flows: autarky, underinvestment, and
unconstrained optimal investment. These thresholds are of
interest because they can be altered by specific policy
interventions. As a consequence, even if β is small, some level of
foreign investment can be supported. We construct measures of β
for 40 countries, characterize β and β*,
and discuss recent trends in investment flows.