TY  - JOUR
AU  - Razin,Assaf
AU  - Sadka,Efraim
AU  - Yuen,Chi-Wa
TI  - Channeling Domestic Savings into Productive Investment Under Asymmetric Information: The Essential Role of Foreign Direct Investment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6338
PY  - 1997
Y2  - December 1997
UR  - http://www.nber.org/papers/w6338
L1  - http://www.nber.org/papers/w6338.pdf
N1  - Author contact info:
Assaf Razin
Department of Economics
Cornell University
Uris 422
Ithaca, NY 14853
Tel: 607/255-9625
Fax: 607/255-2818
E-Mail: ar256@cornell.edu

Efraim Sadka
Tel Aviv University
Eitan Berglas School of Economics
P.O.B. 39040
Ramat Aviv, Tel Aviv, 69978, ISRAEL
E-Mail: sadka@post.tau.ac.il

Chi-wa Yuen
University of Hong Kong
E-Mail: cwyuen@ust.hk
AB  - Foreign direct investment (FDI) is observed to be a predominant form of capital flows to low and middle income countries with insufficiently developed capital markets.  This paper analyzes the problem of channeling domestic savings into productive investment in the presence of asymmetric information between the managing owners of firms and other portfolio stakeholders.  We emphasize the crucial role played by FDI in sustaining equity-financed capital investment for economies plagued by such information problems.  Similar problems also exist for foreign portfolio debt flows.  The paper identifies how, in the presence of information asymmetry, different capital market structures may lead to foreign over- or under-investment and to domestic under- or over-saving, and thus to inefficient equilibria.  We show how corrective tax-subsidy policies consisting of taxes on corporate income and the capital incomes of both residents and nonresidents can restore efficiency.
ER  -