Working Paper: CEPR ID: DP5755
Authors: Dalia Marin; Monika Schnitzer
Abstract: In this paper we analyze the conditions under which a foreign direct investment (FDI) involves a net capital flow across countries. Frequently, foreign direct investment is financed in the host country without an international capital movement. We develop a model in which the optimal choice of financing an international investment trades off the relative costs and benefits associated with the allocation and effectiveness of control rights resulting from the financing decision. We find that the financing choice is driven by managerial incentive problems and that FDI involves an international capital flow when these problems are not too large. Our results are consistent with data from a survey on German and Austrian investments in Eastern Europe.
Keywords: Firm specific capital; Costs; Internal capital markets; International capital flows; Multinational firms
JEL Codes: D23; F21; F23; G32; L20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| managerial incentive problems (M52) | international capital flow (F21) |
| severity of incentive problems (D82) | choice of financing method (G32) |
| repayment problem severe and effort problem small (C59) | size of credit chosen by investor (G11) |
| larger distances between headquarters and investment projects (F29) | reduced effectiveness of monitoring (E61) |
| reduced effectiveness of monitoring (E61) | financing decision (G32) |