Working Paper: CEPR ID: DP3619
Authors: Ashoka Mody; Assaf Razin; Efraim Sadka
Abstract: We develop a simple information-based model of FDI flows in which the abundance of intangible capital in the source countries, which generates expertise in cream-skimming investment projects in the host countries and enhances FDI flows. Corporate transparency in the host countries, on the other hand, diminishes the value of this expertise and thereby reduces the flow of FDI. Empirical evidence (from a sample of 12 source countries and 45 host countries over the 1980s and 1990s) which is analysed in a gravity equation model provides some support to our theoretical hypotheses. The gains from FDI in the host country in our model are reflected in a more efficient size of stock of domestic capital and its allocation across firms. These gains depend crucially (and inversely) on the degree of competition among FDI investors.
Keywords: competition among FDI investors; corporate transparency; FDI flows; nontraditional gains from trade; portfolio equity flows
JEL Codes: F00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| abundance of intangible capital in source countries (F21) | enhances FDI flows into host countries (F21) |
| corporate transparency in host countries (G38) | reduces FDI inflows (F21) |
| gains from FDI in the host country (F23) | reflected in a more efficient size of domestic capital stock and its allocation across firms (D29) |
| degree of competition among FDI investors (F23) | influences gains from FDI (F23) |
| level of corporate transparency (G38) | influences magnitude of gains from FDI (F23) |
| specialization of industries in source countries (F12) | influences magnitude of gains from FDI (F23) |