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FDI Contribution to Capital Flows and Investment in Capacity


  • Assaf Razin


The paper surveys a theory of FDI, which captures a unique feature: hands-on management standards, that enable investors to react in real time to a changing economic environment. Equipped with superior managerial skills, foreign direct investors are able to outbid portfolio investors for the top productivity firms in a particular industry in which they have specialized in the source country. Consequently, FDI investors would make investment, both larger, and of higher quality (namely, with large rates of returns), than the domestic investors. The theory can explain both two-way FDI flows among developed countries, and one-way FDI flows from developed to developing countries. Gains to the host country from FDI stem from the informational value of FDI. The predictions of the theory are consistent with evidence from panel data: larger FDI coefficients in the domestic investment and output growth regressions relative to the portfolio equity flow and international loan coefficients, reflect a more significant role for FDI in the domestic investment process than other types of capital inflows.

Suggested Citation

  • Assaf Razin, 2002. "FDI Contribution to Capital Flows and Investment in Capacity," NBER Working Papers 9204, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9204
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    References listed on IDEAS

    1. Mody, Ashoka & Razin, Assaf & Sadka, Efraim, 2002. "The Role of Information in Driving FDI: Theory and Evidence," CEPR Discussion Papers 3619, C.E.P.R. Discussion Papers.
    2. Caves, Richard E, 1971. "International Corporations: The Industrial Economics of Foreign Investment," Economica, London School of Economics and Political Science, vol. 38(149), pages 1-27, February.
    3. Blomström, Magnus & Globerman, Steven & Kokko, Ari, 1999. "The Determinants of Host Country Spillovers from Foreign Direct Investment: Review and Synthesis of the Literature," SSE/EFI Working Paper Series in Economics and Finance 339, Stockholm School of Economics.
    4. Kenneth A. Froot, 1991. "Japanese Foreign Direct Investment," NBER Working Papers 3737, National Bureau of Economic Research, Inc.
    5. Oliver Hart, 2001. "Financial Contracting," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1079-1100, December.
    6. Albuquerque, Rui, 2003. "The composition of international capital flows: risk sharing through foreign direct investment," Journal of International Economics, Elsevier, vol. 61(2), pages 353-383, December.
    7. Barry P. Bosworth & Susan M. Collins, 1999. "Capital Flows to Developing Economies: Implications for Saving and Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 143-180.
    8. Blomström, Magnus & Globerman, Steve & Kokko, Ari, 2000. "The Determinants of Host Country Spillovers from Foreign Direct Investment," CEPR Discussion Papers 2350, C.E.P.R. Discussion Papers.
    9. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
    10. Razin, Assaf & Sadka, Efraim, 2003. "Gains from FDI inflows with incomplete information," Economics Letters, Elsevier, vol. 78(1), pages 71-77, January.
    11. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-471, June.
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    Cited by:

    1. Assaf Razin & Efraim Sadka, 2004. "Transparency, Specialization and FDI (new title: Corporate Transparency, Cream-Skimming and FDI)," CESifo Working Paper Series 1161, CESifo Group Munich.
    2. Barbara Pfeffer, 2008. "FDI and FPI - Strategic Complements?," MAGKS Papers on Economics 200812, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    3. SULIMAN, Osman, 2013. "Do Capital Inflows Cause Currency Black Markets In Mena Countries? Causality Tests For Heterogeneous Panels," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 13(1), pages 187-202.
    4. Reza Y Siregar & Keen Meng Choy, 2010. "Determinants of International Bank Lending from the Developed World to East Asia," IMF Staff Papers, Palgrave Macmillan, vol. 57(2), pages 484-516, June.
    5. Ahsen Mukhtar & Muhammad Asif & Ghamz-e-Ali Siyal & Khalid Zaman, 2014. "Institutional-Macroeconomic Nexus: Inducement on Foreign Direct Investment (FDI) in Pakistan," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 2(11), pages 465-479, November.
    6. Calderon, Cesar & Loayza, Norman & Serven, Luis, 2004. "Greenfield foreign direct investment and mergers and acquisitions - feedback and macroeconomic effects," Policy Research Working Paper Series 3192, The World Bank.
    7. Owen C. H. Ho, 2004. "Determinants of Foreign Direct Investment in China: A Sectoral Analysis," Economics Discussion / Working Papers 04-18, The University of Western Australia, Department of Economics.
    8. Yamin Ahmad & Pietro Cova & Rodrigo Harrison, 2004. "Foreign Direct Investment versus Portfolio Investment : A Global Games Approach," Working Papers 05-03, UW-Whitewater, Department of Economics.
    9. Gordon de Brouwer, 2003. "Macroeconomics and Governance," Treasury Working Papers 2003-04, The Treasury, Australian Government, revised Dec 2003.
    10. Osman Suliman, 2008. "Do Capital Inflows Cause Currency Black Markets in MENA? Causality Tests for Heterogeneous Panels," Working Papers 381, Economic Research Forum, revised 01 Jan 2008.
    11. Bélyácz, Iván & Kuti, Mónika, 2009. "Külföldi működőtőke és külső eladósodás. Kísérlet a makrogazdasági tőkestruktúra új szempontú vizsgálatára
      [Foreign operating capital and foreign indebtedness. An attempt to examine macroeconomic c
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 133-154.

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    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance

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