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An Information-Based Model of Foreign Direct Investment: the Gains from Trade Revisited

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Author Info

  • Razin, A.
  • Sadka, E.
  • Yuen, C.-W.

Abstract

Foreign direct investment (FDI) is observed to be a predominant form of capital flows to emerging economies, especially when they are liquidity-constrained internationally during a global financial crisis. The financial aspects of FDI are the focus of the paper. We analyze the problem of channeling domestic savings into productive investment in the presence of asymmetric information between the managing owners of firms and the other portfolio stakeholders. We explore the role played by FDI in reviving equity-financed capital investment for economies plagued by such information problems. In the presence of information asymmetry, the paper identifies how, however, FDI gives rise to foreign overinvestment as well as domestic undersaving.

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Bibliographic Info

Paper provided by Tel Aviv in its series Papers with number 28-98.

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Length: 31 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:fth:teavfo:28-98

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Postal: Israel TEL-AVIV UNIVERSITY, THE FOERDER INSTITUTE FOR ECONOMIC RESEARCH, RAMAT AVIV 69 978 TEL AVIV ISRAEL.
Phone: 972-3-640-9255
Fax: 972-3-640-5815
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Web page: http://econ.tau.ac.il/research/foerder.asp
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Keywords: CAPITAL FLOWS ; INVESTMENTS ; ECONOMIC INTEGRATION;

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References

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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.:
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  1. Razin, A. & Sadka, E. & Yuen, C.W., 1997. "Implications of the Home Bias: A Pecking Order of Capital Inflows and Corrective Taxation," Papers 32-97, Tel Aviv.
  2. Barry, F & Bradley, J, 1997. ""FDI and Trade : The Irish Host-Country Experience"," Papers 97/13, College Dublin, Department of Political Economy-.
  3. Roberto Chang & Andres Velasco, 1998. "The Asian Liquidity Crisis," NBER Working Papers 6796, National Bureau of Economic Research, Inc.
  4. Jacob Frenkel & Assaf Razin & Efraim Sadka, 1991. "International Taxation in an Integrated World," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512149.
  5. Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
  6. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  8. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Scholarly Articles 3445092, Harvard University Department of Economics.
  9. repec:pra:mprapa:23265 is not listed on IDEAS
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Citations

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Cited by:
  1. Razin, A. & Sadka, E. & Yuen, C.-W., 1999. "Excessive FDI Flows under Asymmetric Information," Papers 27-99, Tel Aviv.
  2. Fuest, Clemens & Huber, Bernd & Nielsen, Soren B., 2003. "Why is the corporate tax rate lower than the personal tax rate?: The role of new firms," Journal of Public Economics, Elsevier, vol. 87(1), pages 157-174, January.
  3. Diemo Dietrich, 2003. "Investment Behaviour of Financially Constrained Multinational," Macroeconomics 0309008, EconWPA.
  4. Jing, Chao & Kaempfer, William H. & Lowenberg, Anton D., 2003. "A public choice model of the role of multinational firms in international relations," The North American Journal of Economics and Finance, Elsevier, vol. 14(1), pages 131-144, March.
  5. Assaf Razin & Efraim Sadka & Chi-Wa Yuen, 2001. "Social Benefits and Losses from FDI: Two Nontraditional Views," NBER Chapters, in: Regional and Global Capital Flows: Macroeconomics Causes and Consequences, NBER-EASE Volume 10, pages 311-336 National Bureau of Economic Research, Inc.
  6. Buch, Claudia M. & Heinrich, Ralph P. & Schertler, Andrea, 2003. "External and Internal Financial Structures in Europe: A Corporate Finance Perspective," EIFC - Technology and Finance Working Papers 19, United Nations University, Institute for New Technologies.

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