NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Ashoka Mody, Assaf Razin, Efraim Sadka

NBER Working Paper No. 9662
Issued in May 2003
NBER Program(s):   IFM   ITI

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 12 source countries and 45 host countries over the 1980s and 1990s) analyzed in a gravity-equation model, provides support to the theoretical hypotheses. The model also demonstrates that the gains for the host country from foreign direct investment [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.

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Document Object Identifier (DOI): 10.3386/w9662

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