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The pecking order of cross-border investment

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Author Info
Christian Daude () (University of Maryland at College Park, Department of Economics, 3105 Tydings Hall College Park, MD 20742, USA.)
Marcel Fratzscher () (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)

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Abstract

Is there a pecking order of cross-border investment in that countries become financially integrated primarily through some types of investment rather than others? Using a novel database of bilateral capital stocks for all types of investment – FDI, portfolio equity securities, debt securities as well as loans – for a broad set of 77 countries, we show that such a pecking order indeed exists. Motivated by the theoretical work on the capital structure of firms, the paper focuses on two key determinants of this pecking order: information frictions and the quality of host country institutions. Overall, we find that in particular FDI, and to some extent also loans, are substantially more sensitive to information frictions than investment in portfolio equity and debt securities. We also show that the share as well as the size of FDI that a country receive are largely insensitive to institutional factors in host countries, while portfolio investment is by far the most sensitive to the quality of institutions. This provides new evidence in favor of some hypotheses but contradicts others put forward in the theoretical literature on trade in financial assets. JEL Classification: F34; G11; F21.

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Paper provided by European Central Bank in its series Working Paper Series with number 590.

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Length: 52 pages
Date of creation: Feb 2006
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Handle: RePEc:ecb:ecbwps:20060590

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Related research
Keywords: Foreign investment; pecking order; capital flows; information frictions; institutions; home bias; gravity.;

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christian Daude & Marcel Fratzscher, 2007. "The pecking order of cross-border investment," CGFS Papers chapters, in: Bank for International Settlements (ed.), Research on global financial stability: the use of BIS international financial statistics, volume 29, pages 53-89 Bank for International Settlements. [Downloadable!]
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  2. Fratzscher, Marcel & Imbs, Jean, 2007. "Risk Sharing, Finance and Institutions in International Portfolios," CEPR Discussion Papers 6496, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Eduardo A. Cavallo & Christian Daude, 2008. "Public Investment in Developing Countries: A Blessing or a Curse?," RES Working Papers 4597, Inter-American Development Bank, Research Department. [Downloadable!]
  4. Beata S. Javorcik & Shang-Jin Wei, 2009. "Corruption and Cross-Border Investment in Emerging Markets: Firm-Level Evidence," Working Papers 062009, Hong Kong Institute for Monetary Research. [Downloadable!]
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  5. Marcel Fratzscher, 2007. "US shocks and global exchange rate configurations," Working Paper Series 835, European Central Bank. [Downloadable!]
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  6. Lucía Cuadro Sáez & Marcel Fratzscher & Christian Thimann, 2007. "The transmission of emerging market shocks to global equity markets," Banco de España Working Papers 0727, Banco de España. [Downloadable!]
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