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Foreign Direct Investment versus Portfolio Investment : A Global Games Approach

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Author Info

  • Yamin Ahmad

    ()
    (Department of Economics, University of Wisconsin - Whitewater)

  • Pietro Cova

    ()
    (Department of Economics, Georgetown University)

  • Rodrigo Harrison

    ()
    (Instituto de Economía, Universidad Católica de Chile)

Abstract

We present a model of investment under uncertainty about fundamentals, using a global games approach. Goldstein & Razin (2003) show that there is an information based trade-off between foreign direct investment (FDI) and portfolio investment (PI) which rationalizes some well known stylised facts in the literature - the relative volatility and reversibility of foreign direct investment versus portfolio investment. We extend their result and show that uncertainty about fundamentals does not imply a multiplicity of investment outcomes even when there is an information-based trade-off between direct investments and portfolio investments. In our paper, uncertainty about fundamentals actually helps narrow down the set of possible equilibria. Hence we find that the equilibrium outcome does not exhibit co-ordination failure.

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Bibliographic Info

Paper provided by UW-Whitewater, Department of Economics in its series Working Papers with number 05-03.

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Length: 26 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:uww:wpaper:05-03

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Keywords: Foreign Direct Investment; Portfolio Investment; Global Games; Financial Transparency;

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References

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  1. Daron Acemoglu & Simon Johnson & James Robinson & Yunyong Thaicharoen, 2002. "Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth," NBER Working Papers 9124, National Bureau of Economic Research, Inc.
  2. Assaf Razin & Ashoka Mody & Efraim Sadka, 2002. "The Role of Information in Driving FDI: Theory and Evidence," NBER Working Papers 9255, National Bureau of Economic Research, Inc.
  3. Assaf Razin, 2003. "FDI Contribution to Capital Flows and Investment in Capacity," Working Papers 052003, Hong Kong Institute for Monetary Research.
  4. Albuquerque, Rui & Loayza, Norman & Serven, Luis, 2005. "World market integration through the lens of foreign direct investors," Journal of International Economics, Elsevier, Elsevier, vol. 66(2), pages 267-295, July.
  5. Razin, Assaf & Sadka, Efraim & Coury, Tarek, 2003. "Trade openness, investment instability and terms-of-trade volatility," Journal of International Economics, Elsevier, Elsevier, vol. 61(2), pages 285-306, December.
  6. Acemoglu, Daron & Johnson, Simon H. & Robinson, James A., 2003. "The Rise of Europe: Atlantic Trade, Institutioanl Change and Economic Growth," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 4269-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. R. Gaston Gelos & Shang-Jin Wei, 2002. "Transparency and International Investor Behavior," NBER Working Papers 9260, National Bureau of Economic Research, Inc.
  8. Goldstein, Itay & Razin, Assaf, 2003. "An Information-Based Trade-off Between Foreign Direct Investment and Foreign Portfolio Investment: Volatility, Transparency and Welfare," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3747, C.E.P.R. Discussion Papers.
  9. Daron Acemoglu & Simon Johnson, 2003. "Unbundling Institutions," NBER Working Papers 9934, National Bureau of Economic Research, Inc.
  10. Philip R. Lane & Gian-Maria Milesi-Ferretti, 2003. "International Financial Integration," IMF Working Papers 03/86, International Monetary Fund.
  11. Flavio Toxvaerd & Chryssi Giannitsarou, 2004. "Recursive global games," Money Macro and Finance (MMF) Research Group Conference 2003 104, Money Macro and Finance Research Group.
  12. repec:rus:hseeco:72137 is not listed on IDEAS
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Cited by:
  1. Gozgor, Giray & Erzurumlu, Yaman O., 2010. "Causality relations between foreign direct investment and portfolio investment volatility," MPRA Paper 34352, University Library of Munich, Germany.
  2. Muhammad Shahbaz & Mohammad Mafizur Rahman, 2012. "The Dynamic of Financial Development, Imports, Foreign Direct Investment and Economic Growth: Cointegration and Causality Analysis in Pakistan," Global Business Review, International Management Institute, International Management Institute, vol. 13(2), pages 201-219, June.

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