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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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References

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  1. Assaf Razin & Efraim Sadka, 2002. "Gains from FDI Inflows with Incomplete Information," NBER Working Papers 9008, National Bureau of Economic Research, Inc.
  2. Rui Albuquerque, 2004. "The Composition of International Capital Flows: Risk Sharing Through Foreign Direct Investment," International Finance 0405004, EconWPA.
  3. 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, vol. 92(3), pages 664-682, June.
  4. Oliver Hart, 2001. "Financial Contracting," Harvard Institute of Economic Research Working Papers 1924, Harvard - Institute of Economic Research.
  5. Robert E. Lipsey, 2000. "The Role of Foreign Direct Investment in International Capital Flows," NBER Working Papers 7094, National Bureau of Economic Research, Inc.
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  8. Patrick BOLTON & Ernst-Ludwig VON THADDEN, 1996. "Blocks, Liquidity, and Corporate Control," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9619, Université de Lausanne, Faculté des HEC, DEEP.
  9. Charles Kahn & Andrew Winton, 1998. "Ownership Structure, Speculation, and Shareholder Intervention," Journal of Finance, American Finance Association, vol. 53(1), pages 99-129, 02.
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  11. Razin, Assaf & Sadka, Efraim & Yuen, Chi-Wa, 1998. "A pecking order of capital inflows and international tax principles," Journal of International Economics, Elsevier, vol. 44(1), pages 45-68, February.
  12. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
  13. Sarno, Lucio & Taylor, Mark P., 1999. "Hot money, accounting labels and the permanence of capital flows to developing countries: an empirical investigation," Journal of Development Economics, Elsevier, vol. 59(2), pages 337-364, August.
  14. Robert E. Lipsey, 2001. "Foreign Direct Investors in Three Financial Crises," NBER Working Papers 8084, National Bureau of Economic Research, Inc.
  15. Admati, Anat R & Pfleiderer, Paul, 1991. "Sunshine Trading and Financial Market Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 443-81.
  16. Foster, F Douglas & Viswanathan, S, 1990. "A Theory of the Interday Variations in Volume, Variance, and Trading Costs in Securities Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 593-624.
  17. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
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Citations

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Cited by:
  1. Gilad Aharonovitz, 2006. "Migration of Firms, Home Bias and the Geographical Distribution of Growth," DEGIT Conference Papers c011_038, DEGIT, Dynamics, Economic Growth, and International Trade.
  2. Stephane Straub, 2004. "Opportunism, Corruption and the Multinational Firm’s Mode of Entry," ESE Discussion Papers 102, Edinburgh School of Economics, University of Edinburgh.
  3. Fratzscher, Marcel & Imbs, Jean, 2007. "Risk sharing, finance and institutions in international portfolios," Working Paper Series 0826, European Central Bank.
  4. Resiandini, Pramesti, 2010. "Financial development and trade: evidence from the world's three largest economies," MPRA Paper 25631, University Library of Munich, Germany.
  5. Alejandro Rodríguez Arana, 2005. "Endogenous Growth and Comparative Standards of Living between Mexico and the US," DEGIT Conference Papers c010_035, DEGIT, Dynamics, Economic Growth, and International Trade.
  6. Daude, Christian & Fratzscher, Marcel, 2006. "The pecking order of cross-border investment," Working Paper Series 0590, European Central Bank.
  7. 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., vol. 3(2), pages 7-32, Enero-Jun.
  8. Barbara Pfeffer, 2008. "FDI and FPI - Strategic Complements?," MAGKS Papers on Economics 200812, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  9. 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.

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