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How Different are FDI and FPI Flows?: Distance and Capital Market Integration

Author

Listed:
  • Hattari, Rabin

    (Asian Development Bank)

  • S. Rajan, Ramkishen

    (George Mason University)

Abstract

The availability of bilateral capital flows between countries has given rise to a number of papers attempting to understand trends and determinants of capital flows between country pairs. Almost without exception, the papers find that the gravity model fits the data quite well. Specifically, while economic sizes of the host and source (measured by GDP, population etc) appear to positively impact bilateral flows in most cases, distance -- broadly proxying some sort of transactions and / or information frictions -- stands out as consistently hindering all types of capital flows. But does greater distance hinder both foreign portfolio investment (FPI) and foreign direct investment (FDI) flows equally? In other words, does distance change the composition of capital flows? This is the specific question that this paper focuses on, differentiating between total FDI, FDI via mergers and acquisitions (M&As) and FPI.

Suggested Citation

  • Hattari, Rabin & S. Rajan, Ramkishen, 2011. "How Different are FDI and FPI Flows?: Distance and Capital Market Integration," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 26, pages 499-525.
    • Handle: RePEc:ris:integr:0547
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    References listed on IDEAS

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    More about this item

    Keywords

    Distance; Foreign Direct Investment (FDI); Foreign Portfolio Investment (FPI); Gravity; Mergers and Acquisitions (M&As);
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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