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An information-based trade off between foreign direct investment and foreign portfolio investment

Author: Itay Goldstein; Assaf Razin; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2005.
Series: Working paper series (National Bureau of Economic Research), no. 11757.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
"The paper develops a model of foreign direct investments (FDI) and foreign portfolio investments (FPI). The model describes an information-based trade off between direct investments and portfolio investments. Direct investors are more informed about the fundamentals of their projects. This information enables them to manage their projects more efficiently. However, it also creates an asymmetric-information problem  Read more...
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Additional Physical Format: Print version:
Goldstein, Itay.
Information-based trade off between foreign direct investment and foreign portfolio investment.
Cambridge, Mass. : National Bureau of Economic Research, ©2005
(OCoLC)62480031
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Itay Goldstein; Assaf Razin; National Bureau of Economic Research.
OCLC Number: 62275379
Notes: November 2005.
Reproduction Notes: Electronic reproduction. [S.l.] : HathiTrust Digital Library, 2010. MiAaHDL
Description: 1 online resource (35 pages) : illustrations.
Details: Master and use copy. Digital master created according to Benchmark for Faithful Digital Reproductions of Monographs and Serials, Version 1. Digital Library Federation, December 2002.
Series Title: Working paper series (National Bureau of Economic Research), no. 11757.
Responsibility: Itay Goldstein, Assaf Razin.

Abstract:

"The paper develops a model of foreign direct investments (FDI) and foreign portfolio investments (FPI). The model describes an information-based trade off between direct investments and portfolio investments. Direct investors are more informed about the fundamentals of their projects. This information enables them to manage their projects more efficiently. However, it also creates an asymmetric-information problem in case they need to sell their projects prematurely, and reduces the price they can get in that case. As a result, investors, who know they are more likely to get a liquidity shock that forces them to sell early, are more likely to choose portfolio investments, whereas investors, who know they are less likely to get a liquidity shock, are more likely to choose direct 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 of FDI relative to FPI, 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. 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"--National Bureau of Economic Research web site.

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