When is FDI a Capital Flow?
Ludwig-Maximilians-Universität Munich - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)
University of Munich - Department of Economics; Centre for Economic Policy Research (CEPR)
June 1, 2006
In this paper we analyze the conditions under which a foreign direct investment (FDI) involves a net capital flow across countries. Frequently, foreig direct investment is financed in the host country without an international capital movement. We develop a model in which the optimal choice of financing an international investment trades of the relative costs and benefits associated with the allocation and effectiveness of control rights resulting from the financing decision. We find that the financing choice is driven by managerial incentive problems and that FDI involves an international capital flow when these problems are not too large. Our results are consistent with data from a survey on German and Austrian investments in Eastern Europe.
Number of Pages in PDF File: 36
Keywords: Multinational firms, Firm specific capital costs, Internal capital markets, International capital flows
JEL Classification: F23, F21, G32, L20, D23working papers series
Date posted: January 15, 2009
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