Foreign Direct Investment versus Portfolio Investment: A Global Games Approach

Yamin S Ahmad, Pietro Cova () and Rodrigo Harrison ()
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Pietro Cova: Department of Economics, Georgetown University
Rodrigo Harrison: Instituto de Economía, Universidad Católica de Chile

Working Papers from UW-Whitewater, Department of Economics

Abstract: We present a model of investment under uncertainty about fundamentals, using a global games approach. Goldstein & Razin (2003) show that there is an information based trade-off between foreign direct investment (FDI) and portfolio investment (PI) which rationalizes some well known stylised facts in the literature - the relative volatility and reversibility of foreign direct investment versus portfolio investment. We extend their result and show that uncertainty about fundamentals does not imply a multiplicity of investment outcomes even when there is an information-based trade-off between direct investments and portfolio investments. In our paper, uncertainty about fundamentals actually helps narrow down the set of possible equilibria. Hence we find that the equilibrium outcome does not exhibit co-ordination failure.

Keywords: Foreign Direct Investment; Portfolio Investment; Global Games; Financial Transparency (search for similar items in EconPapers)
JEL-codes: C71 D82 F21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk
Date: Written
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