An Information-Based Model of Foreign Direct Investment: the Gains from Trade Revisited

Assaf Razin, Efraim Sadka and C.-W. Yuen

Working Papers from Tel Aviv

Abstract: Foreign direct investment (FDI) is observed to be a predominant form of capital flows to emerging economies, especially when they are liquidity-constrained internationally during a global financial crisis. The financial aspects of FDI are the focus of the paper. We analyze the problem of channeling domestic savings into productive investment in the presence of asymmetric information between the managing owners of firms and the other portfolio stakeholders. We explore the role played by FDI in reviving equity-financed capital investment for economies plagued by such information problems. In the presence of information asymmetry, the paper identifies how, however, FDI gives rise to foreign overinvestment as well as domestic undersaving.

Keywords: CAPITAL FLOWS; INVESTMENTS; ECONOMIC INTEGRATION (search for similar items in EconPapers)
JEL-codes: F21 F30 G15 (search for similar items in EconPapers)
Pages: 31 pages
Date: 1998
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Related works:
Journal Article: An Information-Based Model of Foreign Direct Investment: The Gains from Trade Revisited (1999)
Working Paper: An Information-Based Model of Foreign Direct Investment: The Gains from Trade Revisited (1999)
Working Paper: An Information-Based Model of Foreign Direct Investment: The Gains form Trade Revisited (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:fth:teavfo:28-98

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