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A Mean-Variance Explanation of FDI Flows to Developing Countries

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  • Eva Rytter Sunesen

    (Department of Economics, University of Copenhagen)

Abstract

An important feature of the world economy is the close global and regional integration due to strong trade and investment relations among countries. The high degree of integration between countries is likely to give rise to business cycle synchronisation in which case shocks will spillover from one country to another. This will have implications for the way investors evaluate the return and risk of investing abroad. This paper utilises a simple mean-variance optimisation framework where global and regonal factors capture the interdependence between countries. The model implies that FDI is driven by the risk-adjusted rate of return as well as global and regional spillovers. The preditions of the model are con rmed in a sample of 60 countries over the period 1970-2000.

Suggested Citation

  • Eva Rytter Sunesen, 2008. "A Mean-Variance Explanation of FDI Flows to Developing Countries," Discussion Papers 08-17, University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:kuiedp:0817
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    File URL: http://www.econ.ku.dk/english/research/publications/wp/2008/0817.pdf
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    References listed on IDEAS

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    1. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-1025, July.
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    3. Heathcote, Jonathan & Perri, Fabrizio, 2004. "Financial globalization and real regionalization," Journal of Economic Theory, Elsevier, vol. 119(1), pages 207-243, November.
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    5. Eva Rytter Sunesen, 2006. "Measuring Idiosyncratic Risk: Implications for Capital Flows," Discussion Papers 06-20, University of Copenhagen. Department of Economics.
    6. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
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    10. Rajan, Murli & Friedman, Joseph, 1997. "An examination of the impact of country risk on the international portfolio selection decision," Global Finance Journal, Elsevier, vol. 8(1), pages 55-70.
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    More about this item

    Keywords

    foreign direct investment; risk; portfolio; business cycles;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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