The Role of Information in Driving FDI Flows: Host-Country Transparency and Source-Country Specialization

Author/Editor:

Assaf Razin ; Ashoka Mody ; Efraim Sadka

Publication Date:

July 1, 2003

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

We develop a simple information-based model of FDI flows. On the one hand, the abundance of "intangible" capital in specialized industries in the source countries, which presumably generates expertise in screening investment projects in the host countries, enhances FDI flows. On the other hand, host-country corporate-transparency diminishes the value of this expertise, thereby reducing the flow of FDI. Empirical evidence (from a sample of 9 source countries and 13 host countries over the 1980s and 1990s), analyzed in a gravity-equation model, provides support for the theoretical hypotheses. The model also demonstrates that the gains for the host country from FDI (over foreign portfolio investment (FPI)) are reflected in a more efficient size of the stock of domestic capital and its allocation across firms. These gains are shown to depend crucially (and positively) on the degree of competition among FDI investors.

Series:

Working Paper No. 2003/148

Subject:

Balance of payments Financial institutions Foreign direct investment Intangible capital International trade National accounts Production Productivity Stocks Trade in goods

English

Publication Date:

July 1, 2003

ISBN/ISSN:

9781451856842/1018-5941

Stock No:

WPIEA1482003

Pages:

29

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