When is FDI a Capital Flow?

Dalia Marin and Monika Schnitzer ()

No 5755, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper we analyze the conditions under which a foreign direct investment (FDI) involves a net capital flow across countries. Frequently, foreign direct investment is financed in the host country without an international capital movement. We develop a model in which the optimal choice of financing an international investment trades off the relative costs and benefits associated with the allocation and effectiveness of control rights resulting from the financing decision. We find that the financing choice is driven by managerial incentive problems and that FDI involves an international capital flow when these problems are not too large. Our results are consistent with data from a survey on German and Austrian investments in Eastern Europe.

Keywords: Multinational firms; Search theory; International capital flows; Internal capital markets (search for similar items in EconPapers)
JEL-codes: D23 F21 F23 G32 (search for similar items in EconPapers)
Date: 2006-07
New Economics Papers: this item is included in nep-fin and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: When is FDI a capital flow? (2011)
Working Paper: When is FDI a capital flow? (2011)
Working Paper: When is FDI a Capital Flow? (2006)
Working Paper: When is FDI a Capital Flow? (2006)
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