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Foreign Direct Investment vs. Foreiegn Portfolio Investment

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Author Info

  • 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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Cited by:
  1. Daude, Christian & Fratzscher, Marcel, 2008. "The pecking order of cross-border investment," Journal of International Economics, Elsevier, vol. 74(1), pages 94-119, January.
  2. Malgorzata Sulimierska, 2008. "Capital Account Liberalization and Currency Crisis - The Case of Central Eastern European Countries," International Trade and Finance Association Conference Papers 1140, International Trade and Finance Association.
  3. Fratzscher, Marcel & Imbs, Jean, 2007. "Risk sharing, finance and institutions in international portfolios," Working Paper Series 0826, European Central Bank.
  4. Stephane Straub, 2004. "Opportunism, Corruption and the Multinational Firm’s Mode of Entry," ESE Discussion Papers 102, Edinburgh School of Economics, University of Edinburgh.
  5. Resiandini, Pramesti, 2010. "Financial development and trade: evidence from the world's three largest economies," MPRA Paper 25631, University Library of Munich, Germany.

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