Discussion Paper Details

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Title: The Role of Information in Driving FDI: Theory and Evidence

Author(s): Ashoka Mody, Assaf Razin and Efraim Sadka

Publication Date: November 2002

Keyword(s): competition among FDI investors, corporate transparency, FDI flows, non-traditional gains from trade and portfolio-equity flows

Programme Area(s): International Macroeconomics

Abstract: We develop a simple information-based model of FDI flows in which the abundance of intangible capital in the source countries, which generates expertise in cream-skimming investment projects in the host countries and enhances FDI flows. Corporate transparency in the host countries, on the other hand, diminishes the value of this expertise and thereby reduces the flow of FDI. Empirical evidence (from a sample of 12 source countries and 45 host countries over the 1980s and 1990s) which is analysed in a gravity equation model provides some support to our theoretical hypotheses. The gains from FDI in the host country in our model are reflected in a more efficient size of stock of domestic capital and its allocation across firms. These gains depend crucially (and inversely) on the degree of competition among FDI investors.

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Bibliographic Reference

Mody, A, Razin, A and Sadka, E. 2002. 'The Role of Information in Driving FDI: Theory and Evidence'. London, Centre for Economic Policy Research.