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When is FDI a capital flow?

  • Marin, Dalia
  • Schnitzer, Monika

In this paper we analyze the conditions under which a foreign direct investment (FDI) involves a net capital flow across countries. For this purpose, we investigate how multinational firms finance their foreign affiliates, globally or locally. We develop a contract theoretical model in which the financing structure is used to govern the incentives of managers. We find that the investment tends to be financed locally if managerial incentive problems are large. Thus, microeconomic governance problems may have macroeconomic implications for the net capital flow to host countries. Our results are consistent with survey data on German and Austrian investment flows of firms to Eastern Europe.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 55 (2011)
Issue (Month): 6 (August)
Pages: 845-861

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Handle: RePEc:eee:eecrev:v:55:y:2011:i:6:p:845-861
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  1. Desai, Mihir & Antras, Pol & Foley, C. Fritz, 2009. "Multinational Firms, FDI Flows and Imperfect Capital Markets," Scholarly Articles 3199065, Harvard University Department of Economics.
  2. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 473-94, July.
  3. Michel A. Habib & D. Bruce Johnsen, 1999. "The Financing and Redeployment of Specific Assets," Journal of Finance, American Finance Association, vol. 54(2), pages 693-720, 04.
  4. Mihir A. Desai & C. Fritz Foley & James R. Hines, 2004. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," Journal of Finance, American Finance Association, vol. 59(6), pages 2451-2487, December.
  5. Gertner, Robert H & Scharfstein, David S & Stein, Jeremy C, 1994. "Internal versus External Capital Markets," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1211-30, November.
  6. Marin, Dalia & Schnitzer, Monika, 1995. "Tying Trade Flows: A Theory of Countertrade with Evidence," American Economic Review, American Economic Association, vol. 85(5), pages 1047-64, December.
  7. Dalia Marin & Monika Schnitzer, 2002. "Contracts in Trade and Transition: The Resurgence of Barter," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133997, June.
  8. Ann E. Harrison & Inessa Love & Margaret S. McMillan, 2002. "Global Capital Flows and Financing Constraints," NBER Working Papers 8887, National Bureau of Economic Research, Inc.
  9. Froot, Kenneth A & Stein, Jeremy C, 1991. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1191-217, November.
  10. Marin, Dalia, 2004. "'A Nation of Poets and Thinkers' - Less So with Eastern Enlargement? Austria and Germany," Discussion Papers in Economics 329, University of Munich, Department of Economics.
  11. Martin Feldstein, 2000. "Aspects of Global Economic Intergration: Outlook for the Future," NBER Working Papers 7899, National Bureau of Economic Research, Inc.
  12. Kesternich, Iris & Schnitzer, Monika, 2007. "Who is Afraid of Political Risk? Multinational Firms and their Choice of Capital Structure," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 213, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  13. Benjamin Hermalin & Andrew K. Rose & Peter M. Garber & Andrew Crockett & David W. Mullins, Jr, 1999. "Risks to Lenders and Borrowers in International Capital Markets," NBER Chapters, in: International Capital Flows, pages 363-420 National Bureau of Economic Research, Inc.
  14. Albuquerque, Rui & Loayza, Norman & Serven, Luis, 2005. "World market integration through the lens of foreign direct investors," Journal of International Economics, Elsevier, vol. 66(2), pages 267-295, July.
  15. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
  16. Lorentowicz, Andzelika & Marin, Dalia & Raubold, Alexander, 2002. "Ownership, Capital or Outsourcing: What Drives German Investment to Eastern Europe?," CEPR Discussion Papers 3515, C.E.P.R. Discussion Papers.
  17. Harrison, Ann E. & McMillan, Margaret S., 2003. "Does direct foreign investment affect domestic credit constraints?," Journal of International Economics, Elsevier, vol. 61(1), pages 73-100, October.
  18. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  19. Leo Ferraris & Raoul Minetti, 2007. "Foreign Lenders and the Real Sector," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 945-964, 06.
  20. Chowdhry, Bhagwan & Nanda, Vikram, 1994. "Financing of multinational subsidiaries: Parent debt vs. external debt," Journal of Corporate Finance, Elsevier, vol. 1(2), pages 259-281, August.
  21. Chowdhry, Bhagwan & Coval, Joshua D., 1998. "Internal financing of multinational subsidiaries: Debt vs. equity1," Journal of Corporate Finance, Elsevier, vol. 4(1), pages 87-106, March.
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