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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9204.

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Date of creation: Sep 2002
Date of revision:
Handle: RePEc:nbr:nberwo:9204
Note: ITI
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  1. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-71, June.
  2. 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.
  3. Oliver Hart, 2001. "Financial Contracting," Harvard Institute of Economic Research Working Papers 1924, Harvard - Institute of Economic Research.
  4. Blomstrom, 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 502, Stockholm School of Economics.
  5. Assaf Razin & Efraim Sadka, 2002. "Gains from FDI Inflows with Incomplete Information," NBER Working Papers 9008, National Bureau of Economic Research, Inc.
  6. Assaf Razin & Ashoka Mody & Efraim Sadka, 2002. "The Role of Information in Driving FDI: Theory and Evidence," NBER Working Papers 9255, National Bureau of Economic Research, Inc.
  7. 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.
  8. 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.
  9. Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
  10. 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.
  11. Kenneth A. Froot, 1991. "Japanese Foreign Direct Investment," NBER Working Papers 3737, National Bureau of Economic Research, Inc.
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