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Citation Information

Type Working Paper
Title Composition of international equity flows
Publication (Day/Month/Year) 2011
URL http://economics.soc.uoc.gr/macro/docs/Year/2011/papers/paper_1_102.Arefeva.pdf
The paper examines the influence of the size of a firm on the investor’s choice between foreign direct and foreign portfolio investment. The foreign direct investment (FDI) is more efficient due to stronger control rights of the investor. But foreign portfolio investment (FPI) is more liquid. The size of the firm brings about additional concerns regarding the FPI vs FDI trade-off. First, large firms have an attractive feature: the government has an incentive to support large firms who face bankruptcy in order to avoid the harmful consequences of their failure for the economy. On the other hand, large FDI firms are more vulnerable to expropriation or nationalization, at least in countries with poor protection of property rights and weak democratic institutions. In the model higher degree of support from the government to big firms results in higher investment in FPI relative to FDI for bigger firms. The preliminary empirical evidence based on the World Bank Survey of Productivity and Investment Climate supports the hypothesis of positive relationship between size of the firm and FPI investment.

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