When is FDI a capital flow?

Dalia Marin and Monika Schnitzer ()

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: In this paper we analyze the conditions under which a foreign direct investment (FDI) involves a net capital flow across countries. For this purpose, we investigate how multinational firms finance their foreign affiliates, globally or locally. We develop a contract theoretical model in which the financing structure is used to govern the incentives of managers. We find that the investment tends to be financed locally if managerial incentive problems are large. Thus, microeconomic governance problems may have macroeconomic implications for the net capital flow to host countries. Our results are consistent with survey data on German and Austrian investment flows of firms to Eastern Europe.

Date: 2011
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Citations: View citations in EconPapers (16)

Published in European Economic Review 6 55(2011): pp. 845-861

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Related works:
Journal Article: 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)
Working Paper: When is FDI a Capital Flow? (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenar:19257

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