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

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  • Ashoka Mody
  • Assaf Razin
  • 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 12 source countries and 45 host countries over the 1980s and 1990s) analyzed in a gravity-equation model, provides support to the theoretical hypotheses. The model also demonstrates that the gains for the host country from foreign direct investment [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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9662.

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Date of creation: May 2003
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Handle: RePEc:nbr:nberwo:9662

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  1. Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
  2. Rachel Griffith & Helen Simpson, 2003. "Characteristics of Foreign-Owned Firms in British Manufacturing," NBER Working Papers 9573, National Bureau of Economic Research, Inc.
  3. Emilia Bonaccorsi di Patti & Giovanni Dell'Ariccia, 2000. "Bank competition and firm creation," Proceedings, Federal Reserve Bank of Chicago 680, Federal Reserve Bank of Chicago.
  4. Barry Eichengreen & Douglas A. Irwin, 1998. "The Role of History in Bilateral Trade Flows," NBER Chapters, National Bureau of Economic Research, Inc, in: The Regionalization of the World Economy, pages 33-62 National Bureau of Economic Research, Inc.
  5. Gopinath, Gita, 2004. "Lending booms, sharp reversals and real exchange rate dynamics," Journal of International Economics, Elsevier, Elsevier, vol. 62(1), pages 1-23, January.
  6. Shang-Jin Wei & Gaston Gelos, 2002. "Transparency and International Investor Behavior," IMF Working Papers, International Monetary Fund 02/174, International Monetary Fund.
  7. 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(1), pages 143-180.
  8. Djankov, Simeon & Hoekman, Bernard, 1999. "Foreign investment and productivity growth in Czech enterprises," Policy Research Working Paper Series, The World Bank 2115, The World Bank.
  9. Assaf Razin & Ashoka Mody & Efraim Sadka, 2003. "The Role of Information in Driving FDI Flows," IMF Working Papers, International Monetary Fund 03/148, International Monetary Fund.
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Cited by:
  1. Kimura, Hidemi & Todo, Yasuyuki, 2010. "Is Foreign Aid a Vanguard of Foreign Direct Investment? A Gravity-Equation Approach," World Development, Elsevier, Elsevier, vol. 38(4), pages 482-497, April.
  2. Annageldy Arazmuradov, 2012. "Foreign Aid, Foreign Direct Investment, and Domestic Investment Nexus in Landlocked Economies of Central Asia," Economic Research Guardian, Weissberg Publishing, Weissberg Publishing, vol. 2(1), pages 129-151, May.
  3. John C. Anyanwu, 2012. "Why Does Foreign Direct Investment Go Where It Goes?: New Evidence From African Countries," Annals of Economics and Finance, Society for AEF, vol. 13(2), pages 425-462, November.
  4. Assaf Razin & Yona Rubinstein & Efraim Sadka, 2004. "Which Countries Export FDI and How Much?," Working Papers, Hong Kong Institute for Monetary Research 152004, Hong Kong Institute for Monetary Research.
  5. Sándor Csengödi & Dieter M. Urban, 2008. "Foreign Takeovers and Wage Dispersion in Hungary," CESifo Working Paper Series 2188, CESifo Group Munich.
  6. Nives Dolšak & Emily Crandall, 2013. "Do we know each other? Bilateral ties and the location of clean development mechanism projects," Climatic Change, Springer, Springer, vol. 118(3), pages 521-536, June.

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