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

Assaf Razin, Ashoka Mody and Efraim Sadka

No 2003/148, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; FDI investor; capital stock; Foreign direct investment; intangible capital; transparency; FDI inflow; high-productivity firm; FDI flow; industry specialization; Trade in goods; Stocks; Productivity (search for similar items in EconPapers)
Pages: 29
Date: 2003-07-01
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Citations: View citations in EconPapers (33)

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Working Paper: The Role of Information in Driving FDI Flows: Host-Country Tranparency and Source Country Specialization (2003)
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