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Article: An Information-Based Model of Foreign Direct Investment: The Gains from Trade Revisited

TitleAn Information-Based Model of Foreign Direct Investment: The Gains from Trade Revisited
Authors
KeywordsAsymmetric information
Domestic credit
Foreign direct investment
Gains from trade
Issue Date1999
PublisherSpringer New York LLC. The Journal's web site is located at http://springerlink.metapress.com/openurl.asp?genre=journal&issn=0927-5940
Citation
International Tax And Public Finance, 1999, v. 6 n. 4, p. 579-596 How to Cite?
AbstractThe financial aspects of Foreign direct investment (FDI) are the focus of this paper. The gains from trade argument (applied to intertemporal trade) is re-examined in this case of informational-asymmetry-driven FDI. FDI is observed to be a predominant form of capital flows to emerging economies, especially when they are liquidity-constrained internationally during a global financial crisis. We analyze the problem of channelling domestic savings into productive investment in the presence of asymmetric information between the managing owners of firms and portfolio stakeholders. We explore the role played by FDI in reviving equity-financed capital investment for economies plagued by such information problems. In the presence of information asymmetry, the paper identifies how FDI gives rise to foreign overinvestment as well as domestic undersaving. We show that the gains from trade could be sizable when the domestic credit market is either under-developed or failing as a result of a financial crisis. But with a well-functioning domestic credit market, the gains turn into losses. Surprisingly, capital may flow into the country even when the autarkic marginal productivity of capital in the domestic economy falls short of the world rate of interest. In such a situation, capital should have efficiently flown out rather than in, and FDI becomes a social loss-generating phenomenon.
Persistent Identifierhttp://hdl.handle.net/10722/85559
ISSN
2015 Impact Factor: 0.627
2015 SCImago Journal Rankings: 0.799
References

 

DC FieldValueLanguage
dc.contributor.authorRazin, Aen_HK
dc.contributor.authorSadka, Een_HK
dc.contributor.authorYuen, CWen_HK
dc.date.accessioned2010-09-06T09:06:34Z-
dc.date.available2010-09-06T09:06:34Z-
dc.date.issued1999en_HK
dc.identifier.citationInternational Tax And Public Finance, 1999, v. 6 n. 4, p. 579-596en_HK
dc.identifier.issn0927-5940en_HK
dc.identifier.urihttp://hdl.handle.net/10722/85559-
dc.description.abstractThe financial aspects of Foreign direct investment (FDI) are the focus of this paper. The gains from trade argument (applied to intertemporal trade) is re-examined in this case of informational-asymmetry-driven FDI. FDI is observed to be a predominant form of capital flows to emerging economies, especially when they are liquidity-constrained internationally during a global financial crisis. We analyze the problem of channelling domestic savings into productive investment in the presence of asymmetric information between the managing owners of firms and portfolio stakeholders. We explore the role played by FDI in reviving equity-financed capital investment for economies plagued by such information problems. In the presence of information asymmetry, the paper identifies how FDI gives rise to foreign overinvestment as well as domestic undersaving. We show that the gains from trade could be sizable when the domestic credit market is either under-developed or failing as a result of a financial crisis. But with a well-functioning domestic credit market, the gains turn into losses. Surprisingly, capital may flow into the country even when the autarkic marginal productivity of capital in the domestic economy falls short of the world rate of interest. In such a situation, capital should have efficiently flown out rather than in, and FDI becomes a social loss-generating phenomenon.en_HK
dc.languageengen_HK
dc.publisherSpringer New York LLC. The Journal's web site is located at http://springerlink.metapress.com/openurl.asp?genre=journal&issn=0927-5940en_HK
dc.relation.ispartofInternational Tax and Public Financeen_HK
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.rightsThe original publication is available at www.springerlink.com-
dc.subjectAsymmetric informationen_HK
dc.subjectDomestic crediten_HK
dc.subjectForeign direct investmenten_HK
dc.subjectGains from tradeen_HK
dc.titleAn Information-Based Model of Foreign Direct Investment: The Gains from Trade Revisiteden_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=0927-5940&volume=6&spage=579&epage=596&date=1999&atitle=An+Information-Based+Model+of+Foreign+Direct+Investment:+The+gains+from+Trade+Revisiteden_HK
dc.identifier.emailYuen, CW: cwyuen@hku.hken_HK
dc.identifier.authorityYuen, CW=rp01123en_HK
dc.description.naturepreprint-
dc.identifier.doi10.1023/A:1008709617617-
dc.identifier.scopuseid_2-s2.0-0346453078en_HK
dc.identifier.hkuros52643en_HK
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-0346453078&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume6en_HK
dc.identifier.issue4en_HK
dc.identifier.spage579en_HK
dc.identifier.epage596en_HK
dc.publisher.placeUnited Statesen_HK
dc.identifier.scopusauthoridRazin, A=7102906968en_HK
dc.identifier.scopusauthoridSadka, E=6602532828en_HK
dc.identifier.scopusauthoridYuen, CW=7101633296en_HK

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