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How Different are FDI and FPI Flows?: Does Distance Alter the Composition of Capital Flows?

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Author Info

  • Rabin Hattari

    (Asian Development Bank)

  • Ramkishen S. Rajan

    (George Mason University, Institute of Southeast Asian Studies and Hong Kong Institute for Monetary Research)

Abstract

The availability of bilateral capital flows between countries has given rise to a number of papers attempting to understand trends and determinants of capital flows between country pairs. Almost without exception, the papers find that the gravity model fits the data quite well. Specifically, while economic sizes of the host and source (measured by GDP, population etc) appear to positively impact bilateral flows in most cases, distance -- broadly proxying some sort of transactions and / or information frictions -- stands out as consistently hindering all types of capital flows. But does greater distance hinder both foreign portfolio investment (FPI) and foreign direct investment (FDI) flows equally? In other words, does distance change the composition of capital flows? This is the specific question that this paper focuses on, differentiating between total FDI, FDI via mergers and acquisitions (M&As) and FPI.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 092011.

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Length: 32 pages
Date of creation: Mar 2011
Date of revision:
Handle: RePEc:hkm:wpaper:092011

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Related research

Keywords: Distance; Foreign Direct Investment (FDI); Foreign Portfolio Investment (FPI); Gravity; Mergers and Acquisitions (M&As);

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References

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  1. Barry Eichengreen & Hui Tong, 2005. "Is China's FDI Coming at the Expense of Other Countries?," NBER Working Papers 11335, National Bureau of Economic Research, Inc.
  2. Beata S. Javorcik & Çaglar Özden & Mariana Spatareanu & Cristina Neagu, 2006. "Migrant Networks and Foreign Direct Investment," Working Papers Rutgers University, Newark 2006-003, Department of Economics, Rutgers University, Newark.
  3. Julian di Giovanni & Contact: iber@haas.berkeley.edu, 2003. "What Drives Capital Flows? The Case of Cross-Border M&A Activity and Financial Deepening," International Trade 0303002, EconWPA.
  4. Chuhan, Punam & Perez-Quiros, Gabriel & Popper, Helen, 1996. "International capital flows : do short-term investment and direct investment differ?," Policy Research Working Paper Series 1669, The World Bank.
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