An information-based trade off between foreign direct investment and foreign portfolio investment

Itay Goldstein, Assaf Razin

Research output: Contribution to journalArticlepeer-review

Abstract

The paper develops a model of foreign direct investments (FDI) and foreign portfolio investments (FPI). FDI enables the owner to obtain refined information about the firm. This superiority, relative to FPI, comes with a cost: a firm owned by the FDI investor has a low resale price because of 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 greater volatility of FDI net inflows relative to FPI net inflows.

Original languageEnglish
Pages (from-to)271-295
Number of pages25
JournalJournal of International Economics
Volume70
Issue number1
DOIs
StatePublished - Sep 2006

Keywords

  • Corporate control
  • Foreign direct investment
  • Foreign portfolio investment
  • Liquidity
  • Transparency

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