FDI Contribution to Capital Flows and Investment in Capacity

33 Pages Posted: 19 Dec 2002 Last revised: 29 Oct 2010

See all articles by Assaf Razin

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2002

Abstract

The paper surveys a theory of FDI, which captures a unique feature: hands-on management standards, that enable investors to react in real time to a changing economic environment. Equipped with superior managerial skills, foreign direct investors are able to outbid portfolio investors for the top productivity firms in a particular industry in which they have specialized in the source country. Consequently, FDI investors would make investment, both larger, and of higher quality (namely, with large rates of returns), than the domestic investors. The theory can explain both two-way FDI flows among developed countries, and one-way FDI flows from developed to developing countries. Gains to the host country from FDI stem from the informational value of FDI. The predictions of the theory are consistent with evidence from panel data: larger FDI coefficients in the domestic investment and output growth regressions relative to the portfolio equity flow and international loan coefficients, reflect a more significant role for FDI in the domestic investment process than other types of capital inflows.

Suggested Citation

Razin, Assaf, FDI Contribution to Capital Flows and Investment in Capacity (September 2002). NBER Working Paper No. w9204. Available at SSRN: https://ssrn.com/abstract=332248

Assaf Razin (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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