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The Role of Information in Driving FDI Flows: Host-Country Transparency and Source-Country Specialization

Author

Listed:
  • Assaf Razin
  • Mr. Ashoka Mody
  • Efraim Sadka

Abstract

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.

Suggested Citation

  • Assaf Razin & Mr. Ashoka Mody & Efraim Sadka, 2003. "The Role of Information in Driving FDI Flows: Host-Country Transparency and Source-Country Specialization," IMF Working Papers 2003/148, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2003/148
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    References listed on IDEAS

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    More about this item

    Keywords

    WP; FDI investor; capital stock; Foreign direct investment; intangible capital; transparency; FDI inflow; high-productivity firm; FDI flow; industry specialization; Trade in goods; Stocks; Productivity;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business

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