Foreign Direct Investment vs. Foreiegn Portfolio Investment

Itay Goldstein B · Assaf Razin

29 citations0/0 files storedNational Bureau of Economic Research

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International Business and FDI Corporate Finance and Governance Global Financial Crisis and Policies

Abstract

The paper develops a model of foreign direct investments (FDI) and foreign portfolio investments (FPI).FDI is characterized by hands-on management style which enables the owner to obtain relatively refined information about the productivity of the firm.This superiority, relative to FPI, comes with a cost: a firm owned by the relatively well-informed FDI investor has a low resale price because of a "lemons" type asymmetric information between the owner and potential buyers.The model can explain several stylized facts regarding foreign equity flows, such as the larger ratio of FDI to FPI inflows in developing countries relative to developed countries, and the smaller volatility of FDI net inflows relative to FPI net inflows.

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References

1983Bank Runs, Deposit Insurance, and Liquidity 1988A Theory of Intraday Patterns: Volume and Price Variability 1996Currency crashes in emerging markets: An empirical treatment 1998Large Shareholders as Monitors: Is There a Trade‐Off between Liquidity and Control?1991Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach 1998Ownership Structure, Speculation, and Shareholder Intervention 1990A Theory of the Interday Variations in Volume, Variance, and Trading Costs in Securities Markets 1998Blocks, Liquidity, and Corporate Control

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