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

By Assaf Razin, Ashoka Mody, Efraim Sadka

July 1, 2003

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Assaf Razin, Ashoka Mody, and Efraim Sadka. The Role of Information in Driving FDI Flows: Host-Country Transparency and Source-Country Specialization, (USA: International Monetary Fund, 2003) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Balance of payments, Financial institutions, Foreign direct investment, Intangible capital, International trade, National accounts, Production, Productivity, Stocks, Trade in goods

Keywords: Capital stock, FDI flow, FDI inflow, FDI investor, Foreign direct investment, High-productivity firm, Industry specialization, Intangible capital, Productivity, Stocks, Trade in goods, Transparency, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/148
Stock No:

WPIEA1482003
ISBN:

9781451856842
ISSN:

1018-5941

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