The Role of Information in Driving FDI Flows: Host-Country Tranparency and Source Country Specialization

Abstract

We develop a simple information-based model of FDI flows. On the one hand, the abundance of

Common currencies and FDI flows

“…In order to explain this "distance puzzle" 6 , both papers develop an information-based model of international transactions that goes beyond the notion of physical proximity and defines the concept of transactional distance. In particular, Mody et al (2003) find that greater host-country transparency reduces FDI relative to trade flows. They explain this result with the fact that when information is more reliable and accessible, the informational advantage of direct ownership is reduced and counterparts can rely on simpler forms of international transaction such as trade.…”

“…The structure of the paper grants also the possibility to test the model presented by Mody et al (2003). There, they postulate a negative link between host country transparency and international investment decisions on the ground that transparency makes the informational advantage of direct ownership less pronounced, so that there is less need to rely on it.…”

“…Even though this may save the researcher from the potential trouble of nonstationariety, too much noise can easily be counterproductive. Loungani et al (2002) and Mody et al (2003) tackle this problem by taking three-year averages of investment flows, but this leaves them with a very short time-series dimension. This approach is not applicable in the present study for three reasons.…”

“…A positive marginal effect on this variable confirms the idea that once the single currency is in place, non-European multinational corporations may find investing in the euro area more favorable than before because the single currency provides more direct access to the wider market represented by the aggregation of national markets of all participating countries. Additionally, it is possible to incorporate one of the predictions emerging from the model presented by Mody et al (2003). There they postulate a negative link between host country transparency and international investment decisions on the ground that transparency renders the informational advantage of direct ownership less pronounced.…”

“…Indeed, additional variables representing more directly informational flows are also significant but their inclusion reduces the effect of distance and thus corroborates the authors' intuition. Loungani et al (2002) and Mody et al (2003) tackle the role of information in driving FDI flows more directly. In order to explain this "distance puzzle" 6 , both papers develop an information-based model of international transactions that goes beyond the notion of physical proximity and defines the concept of transactional distance.…”