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The Role of Information in Driving FDI Flows: Host-Country Transparency and Source-Country Specialization

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Author Info
Ashoka Mody
Efraim Sadka
Assaf Razin

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Abstract

We develop a simple information-based model of FDI flows. On the one hand, the abundance of "intangible" capital in specialized industries in the source countries, which presumably generates expertise in screening investment projects in the host countries, enhances FDI flows. On the other hand, host-country corporate-transparency diminishes the value of this expertise, thereby reducing the flow of FDI. Empirical evidence (from a sample of 9 source countries and 13 host countries over the 1980s and 1990s), analyzed in a gravity-equation model, provides support for the theoretical hypotheses. The model also demonstrates that the gains for the host country from FDI (over foreign portfolio investment (FPI)) are reflected in a more efficient size of the stock of domestic capital and its allocation across firms. These gains are shown to depend crucially (and positively) on the degree of competition among FDI investors.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/148.

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Length: 29 pages
Date of creation: 01 Aug 2003
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Handle: RePEc:imf:imfwpa:03/148

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Keywords: Foreign investment ; Capital ; Transparency ; Economic models ;

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References listed on IDEAS
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. Gopinath, Gita, 2004. "Lending booms, sharp reversals and real exchange rate dynamics," Journal of International Economics, Elsevier, vol. 62(1), pages 1-23, January. [Downloadable!] (restricted)
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    Other versions:
  3. Portes, Richard & Rey, Helene & Oh, Yonghyup, 2001. "Information and capital flows: The determinants of transactions in financial assets," European Economic Review, Elsevier, vol. 45(4-6), pages 783-796, May. [Downloadable!] (restricted)
  4. Barry Eichengreen & Douglas A. Irwin, 1998. "The Role of History in Bilateral Trade Flows," NBER Chapters, in: The Regionalization of the World Economy, pages 33-62 National Bureau of Economic Research, Inc. [Downloadable!]
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  5. Emilia Bonaccorsi di Patti & Giovanni Dell'Ariccia, 2000. "Bank competition and firm creation," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 132-161.
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  6. Oliver Hart, 2001. "Financial Contracting," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1079-1100, December. [Downloadable!] (restricted)
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  7. Richard Portes & Helene Rey, 1999. "The Determinants of Cross-Border Equity Flows," NBER Working Papers 7336, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Gaston R. Gelos & Shang-Jin Wei, 2002. "Transparency and International Investor Behavior," IMF Working Papers 02/174, International Monetary Fund. [Downloadable!]
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  9. Productivity Commission, 2002. "Offshore investment by Australian firms: survey evidence," International Trade 0203001, EconWPA. [Downloadable!]
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  11. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February. [Downloadable!] (restricted)
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  12. Eduardo Borensztein & Jong-Wha Lee & Jose De Gregorio, 1994. "How Does Foreign Direct Investment Affect Economic Growth," IMF Working Papers 94/110, International Monetary Fund.
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  13. Ashoka Mody & Efraim Sadka & Assaf Razin, 2003. "The Role of Information in Driving FDI Flows: Host-Country Transparency and Source-Country Specialization," IMF Working Papers 03/148, International Monetary Fund. [Downloadable!]
    Other versions:
  14. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December. [Downloadable!] (restricted)
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  15. Barry P. Bosworth & Susan M. Collins, 1999. "Capital Flows to Developing Economies: Implications for Saving and Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1999-1), pages 143-180. [Downloadable!]
  16. Rachel Griffith & Helen Simpson, 2003. "Characteristics of Foreign-Owned Firms in British Manufacturing," NBER Working Papers 9573, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September. [Downloadable!]
  18. Ashoka Mody & Antu Panini Murshid, 2002. "Growing Up With Capital Flows," IMF Working Papers 02/75, International Monetary Fund. [Downloadable!]
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  19. Rafael La Porta & Florencio Lopez-deSilanes & Andrei Shleifer & Robert W. Vishny, 1999. "Investor Protection: Origins, Consequences, and Reform," NBER Working Papers 7428, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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. Aaron Tornell, 2003. "Liberalization, Growth and Financial Crises (October 2003)," UCLA Economics Online Papers 276, UCLA Department of Economics. [Downloadable!]
  2. Vlachos, Jonas, 2004. "Does Regulatory Harmonization Increase Bilateral Asset Holdings?," Working Paper Series 612, Research Institute of Industrial Economics. [Downloadable!]
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  3. Assaf Razin & Yona Rubinstein & Efraim Sadka, 2003. "Which Countries Export FDI, and How Much?," NBER Working Papers 10145, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Assaf Razin & Efraim Sadka, 2004. "Transparency, Specialization and FDI," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  5. Csengödi, Sándor / Urban, Dieter M., 2008. "Foreign Takeovers and Wage Dispersion in Hungary," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  6. Aaron Tornell & Frank Westermann & Lorenza Martinez, 2004. "NAFTA and Mexico's Less-Than-Stellar Performance," NBER Working Papers 10289, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Christian Daude & Marcel Fratzscher, 2006. "The pecking order of cross-border investment," Working Paper Series 590, European Central Bank. [Downloadable!]
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  8. Helga Kristjánsdóttir, 2005. "Determinants of Foreign Direct Investment in Iceland," CAM Working Papers 2005-15, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics. [Downloadable!]
  9. Kaufmann, Daniel & Bellver, Ana, 2005. "Transparenting Transparency: Intial Empirics and Policy Applications," MPRA Paper 8188, University Library of Munich, Germany. [Downloadable!]
  10. Ashoka Mody & Assaf Razin & Efraim Sadka, 2003. "The Role of Information in Driving FDI Flows: Host-Country Tranparency and Source Country Specialization," NBER Working Papers 9662, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Sándor Csengödi & Rolf Jungnickel & Dieter M. Urban, 2008. "Foreign Takeovers and Wages in Hungary," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 144(1), pages 55-82, April. [Downloadable!] (restricted)
  12. Elias Papaioannou, 2004. "International Bank Flows:Determinants and Institutional Role," Money Macro and Finance (MMF) Research Group Conference 2004 28, Money Macro and Finance Research Group. [Downloadable!]
  13. Aaron Tornell & Frank Westermann & Lorenza Martinez, 2004. "NAFTA and Mexico's Economic Performance," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  14. KIMURA Hidemi & TODO Yasuyuki, 2007. "Is Foreign Aid a Vanguard of FDI? A Gravity-Equation Approach," Discussion papers 07007, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
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