Citation

Discussion Paper Details

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Title: Channelling Domestic Savings into Productive Investment Under Asymmetric Information: The Essential Role of Foreign Direct Investment

Author(s): Assaf Razin, Efraim Sadka and Chi-Wa Yuen

Publication Date: March 1998

Keyword(s): Asymmetric Information, Foreign Direct Investment, International Taxation and portfolio debt and equity flows

Programme Area(s): International Macroeconomics

Abstract: 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 analyses the problem of channelling 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. 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 non-residents, can restore efficiency.

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Bibliographic Reference

Razin, A, Sadka, E and Yuen, C. 1998. 'Channelling Domestic Savings into Productive Investment Under Asymmetric Information: The Essential Role of Foreign Direct Investment'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1837