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Foreign Direct Investment and Foreign Portfolio Investment in the contemporary globalized world: should they be still treated separately?

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Abstract

Foreign direct investment (FDI) and foreign portfolio investment (FPI) have been long considered as distinct and independent forms of international capital flows, but in the globalized world there are reasons to treat them as interconnected phenomena. This paper analyzes the mutual relationship between FDI and FPI and attempts to answer the question whether they complement or substitute for each other from a foreign investor’s point of view. Firstly, the paper describes the main characteristics of FDI and FPI in terms of a trade-off between their volatility and profitability. Secondly, it provides a literature review on the determinants of these two types of foreign investment. Finally, we analyse the long-run and short-run relationships between FDI and FPI running VECM regressions on data for Poland. Our research suggests that these two forms of foreign investment are substitutes. To be more specific, in economically stable periods FDI tends to dominate over FPI, but during insecurity and economic distress, both in source and host countries, FPI starts to gain importance.

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  • Marcin Humanicki & Robert Kelm & Krzysztof Olszewski, 2013. "Foreign Direct Investment and Foreign Portfolio Investment in the contemporary globalized world: should they be still treated separately?," NBP Working Papers 167, Narodowy Bank Polski, Economic Research Department.
  • Handle: RePEc:nbp:nbpmis:167
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    Cited by:

    1. Pareja-Alcaraz, Pablo, 2017. "Chinese investments in Southern Europe's energy sectors: Similarities and divergences in China's strategies in Greece, Italy, Portugal and Spain," Energy Policy, Elsevier, vol. 101(C), pages 700-710.
    2. Juan Kania-Morales & Robert Mróz, 2014. "Relationship between foreign direct investment stock and foreign portfolio investment stock. Do they really matter for GDP in Poland, Germany, and Great Britain?," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 38.

    More about this item

    Keywords

    capital flows; foreign direct investment; foreign portfolio investment; VECM;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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