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An information-based trade off between foreign direct investment and foreign portfolio investment |
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| Authors: | Itay Goldstein Assaf Razin |
| Institution: | a Finance Department, The Wharton School, University of Pennsylvania, 3620 Locust Walk, Philadelphia, PA 19104, United States b Eitan Berglas School of Economics, Tel Aviv University, Israel c Department of Economics, Cornell University, United States d CEPR, United Kingdom e NBER, United States |
| Abstract: | The paper develops a model of foreign direct investments (FDI) and foreign portfolio investments (FPI). FDI enables the owner to obtain refined information about the firm. This superiority, relative to FPI, comes with a cost: a firm owned by the FDI investor has a low resale price because of asymmetric information between the owner and potential buyers. The model can explain several stylized facts regarding foreign equity flows, such as the larger ratio of FDI to FPI inflows in developing countries relative to developed countries, and the greater volatility of FDI net inflows relative to FPI net inflows. |
| Keywords: | Foreign direct investment Foreign portfolio investment Corporate control Liquidity Transparency |
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