The Role of Information in Driving FDI Flows: Host-Country Transparency and Source-Country Specialization
30 Pages Posted: 30 Jan 2006
Date Written: July 2003
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: Foreign direct investment, intangible capital, transparency
JEL Classification: F2
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