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The Role of Information in Driving FDI Flows

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Author Info

  • Assaf Razin
  • Ashoka Mody
  • Efraim Sadka

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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Bibliographic Info

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

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Length: 29
Date of creation: 01 Jul 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/148

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Related research

Keywords: Foreign direct investment; Foreign investment; Economic models; fdi; investors; direct investment; domestic investment; host countries; foreign capital; foreign direct investor; portfolio investment; international investors; expected value; equity flow; foreign capital flows; manufactured exports; host country; foreign direct investors; host-country; foreign investors; equity flows; international trade; foreign operations; investment strategy; investor protection; host economies; information asymmetry; trade credit; offshore investment; foreign-owned firms; domestic competitors; foreign supplier; rate of return; investment regime; investment projects; host- country;

References

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  1. Djankov, Simeon & Hoekman, Bernard M, 2000. "Foreign Investment and Productivity Growth in Czech Enterprises," World Bank Economic Review, World Bank Group, vol. 14(1), pages 49-64, January.
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  13. Portes, Richard & Rey, Hélène, 2000. "The Determinants of Cross-Border Equity Flows: The Geography of Information," Center for International and Development Economics Research, Working Paper Series qt51w4v95p, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
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