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Foreign Direct Investment vs. Foreiegn Portfolio Investment

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  • Itay Goldstein
  • Assaf Razin

Abstract

The paper develops a model of foreign direct investments (FDI) and foreign portfolio investments (FPI). FDI is characterized by hands-on management style which enables the owner to obtain relatively refined information about the productivity of the firm. This superiority, relative to FPI, comes with a cost: a firm owned by the relatively well-informed FDI investor has a low resale price because of a "lemons" type asymmetric information between the owner and potential buyers. The model can explain several stylized facts regarding foreign equity flows, such as the larger ratio of FDI to FPI inflows in developing countries relative to developed countries, and the smaller volatility of FDI net inflows relative to FPI net inflows.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11047.

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Date of creation: Jan 2005
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Handle: RePEc:nbr:nberwo:11047

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  1. Michael W. Klein & Joe Peek & Eric S. Rosengren, 2002. "Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit," American Economic Review, American Economic Association, American Economic Association, vol. 92(3), pages 664-682, June.
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  7. Assaf Razin & Efraim Sadka, 2002. "Gains from FDI Inflows with Incomplete Information," NBER Working Papers 9008, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Daude, Christian & Fratzscher, Marcel, 2008. "The pecking order of cross-border investment," Journal of International Economics, Elsevier, Elsevier, vol. 74(1), pages 94-119, January.
  2. Alejandro Rodriguez Arana, 2007. "Endogenous growth in Mexico: The role of US economic activity and balance of payments transfers," EconoQuantum, Revista de Economia y Negocios, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 3(2), pages 7-32, Enero-Jun.
  3. Fratzscher, Marcel & Imbs, Jean, 2007. "Risk sharing, finance and institutions in international portfolios," Working Paper Series, European Central Bank 0826, European Central Bank.
  4. Stephane Straub, 2004. "Opportunism, Corruption and the Multinational Firm’s Mode of Entry," ESE Discussion Papers, Edinburgh School of Economics, University of Edinburgh 102, Edinburgh School of Economics, University of Edinburgh.
  5. Barbara Pfeffer, 2008. "FDI and FPI - Strategic Complements?," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 200812, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  6. Resiandini, Pramesti, 2010. "Financial development and trade: evidence from the world's three largest economies," MPRA Paper 25631, University Library of Munich, Germany.
  7. Malgorzata Sulimierska, 2008. "Capital Account Liberalization and Currency Crisis - The Case of Central Eastern European Countries," International Trade and Finance Association Conference Papers, International Trade and Finance Association 1140, International Trade and Finance Association.
  8. Gilad Aharonovitz, 2006. "Migration of Firms, Home Bias and the Geographical Distribution of Growth," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c011_038, DEGIT, Dynamics, Economic Growth, and International Trade.
  9. Alejandro Rodríguez Arana, 2005. "Endogenous Growth and Comparative Standards of Living between Mexico and the US," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c010_035, DEGIT, Dynamics, Economic Growth, and International Trade.

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