TY  - JOUR
AU  - Goldstein,Itay
AU  - Razin,Assaf
TI  - An Information-Based Trade Off Between Foreign Direct Investment and Foreign Portfolio Investment: Volatility, Transparency, and Welfare
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9426
PY  - 2003
Y2  - January 2003
UR  - http://www.nber.org/papers/w9426
L1  - http://www.nber.org/papers/w9426.pdf
N1  - Author contact info:
Itay Goldstein
Wharton School
University of Pennsylvania
Philadelphia, PA  19104
E-Mail: itayg@wharton.upenn.edu

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
AB  - The paper develops a model of foreign direct investments (FDI) and foreign portfolio investments.  FDI is characterized by hands-on management style which enables the owner to obtain relatively refined information about the productivity of the firm. This superiority, relative to portfolio investments, comes with a cost: A firm owned by the relatively well-informed FDI investor has a low resale price because of a  lemons' type asymmetric information between the owner and potential buyers. Consequently, investors, who have a higher (lower) probability of getting a liquidity shock that forces them to sell early, will invest in portfolio (direct) investments. This result can explain the greater volatility of portfolio investments relative to direct investments. Motivated by empirical evidence, we show that this pattern may be weaker in developed economies that have higher levels of transparency in the capital market and better corporate governance. We also study welfare implications of the model.
ER  -