Citation

Discussion Paper Details

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Title: When is FDI a Capital Flow?

Author(s): Dalia Marin and Monika Schnitzer

Publication Date: July 2006

Keyword(s): firm specific capital costs, internal capital markets, international capital flows and multinational firms

Programme Area(s): Industrial Organization, Institutions and Economic Performance, International Macroeconomics and International Trade and Regional Economics

Abstract: In this paper we analyze the conditions under which a foreign direct investment (FDI) involves a net capital flow across countries. Frequently, foreign direct investment is financed in the host country without an international capital movement. We develop a model in which the optimal choice of financing an international investment trades off the relative costs and benefits associated with the allocation and effectiveness of control rights resulting from the financing decision. We find that the financing choice is driven by managerial incentive problems and that FDI involves an international capital flow when these problems are not too large. Our results are consistent with data from a survey on German and Austrian investments in Eastern Europe.

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Bibliographic Reference

Marin, D and Schnitzer, M. 2006. 'When is FDI a Capital Flow?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5755