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Composition of International Capital Flows: A Survey

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  • Razin, Assaf
  • Kirabaeva, Korolai

Abstract

In this survey, we focus on key mechanisms through which liquidity and financial shocks affect major types of capital flows. We focus on a few models that examine the role of asymmetric information, liquidity preferences, limited enforcement, and incomplete markets on the composition of capital flows. We show that the information asymmetry between foreign and domestic investors leads to inefficient investment allocation and borrowing in a country that finances its domestic investment through foreign debt or foreign equity. In the presence of asymmetric information between sellers and buyers in the capital market, foreign direct investment is associated with higher liquidation costs due to the adverse selection. The exposure to liquidity shocks can explain the composition of equity flows (FDI vs. FPI) between developed and emerging countries, as well as FDI flow patterns during financial crisis. In each section we also discuss the empirical relevance of the models in view of the empirical evidence.

Suggested Citation

  • Razin, Assaf & Kirabaeva, Korolai, 2010. "Composition of International Capital Flows: A Survey," CEPR Discussion Papers 7664, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7664
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    Cited by:

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    2. G. Andrew Karolyi & David T. Ng & Eswar S. Prasad, 2013. "The Coming Wave," Working Papers 082013, Hong Kong Institute for Monetary Research.
    3. Contessi, Silvio & De Pace, Pierangelo & Francis, Johanna L., 2013. "The cyclical properties of disaggregated capital flows," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 528-555.
    4. Franz R. Hahn, 2010. "Globale Kapitalmärkte – Chance oder Gefahr für Transformationsländer?," WIFO Monatsberichte (monthly reports), WIFO, vol. 83(2), pages 137-148, February.
    5. Hattari, Rabin & S. Rajan, Ramkishen, 2011. "How Different are FDI and FPI Flows?: Distance and Capital Market Integration," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 26, pages 499-525.
    6. Kim, Tae-Joon & Ryou, Jai-Won, 2010. "What Makes International Capital Flows So Volatile?: Push vs. Pull Factors in the Case of Korea," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 14(2), pages 111-135, December.
    7. Martin Schmitz, 2011. "Financial reforms and capital flows to emerging Europe," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 38(4), pages 579-605, November.
    8. Bacchetta Philippe & Benhima Kenza, 2010. "The Demand for Liquid Assets, Corporate Saving, and Global Imbalances," Cahiers de Recherches Economiques du Département d'économie 10.12, Université de Lausanne, Faculté des HEC, Département d’économie.
    9. M. de Sola Perea & Ch. Van Nieuwenhuyze, 2014. "Financial integration and fragmentation in the euro area," Economic Review, National Bank of Belgium, issue i, pages 99-125, June.
    10. Peeters, Marga & Sabri, Nidal Rachid, 2012. "International financial integration of Mediterranean economies : A bird’s-eye view," MPRA Paper 38081, University Library of Munich, Germany.
    11. Cavoli, Tony, 2014. "Substitutes or complements? The interactions between components of capital inflows for Asia," Journal of Asian Economics, Elsevier, vol. 31, pages 32-41.
    12. Anton Jevcak & Ralph Setzer & Massimo Suardi, 2010. "Determinants of Capital Flows to the New EU Member States Before and During the Financial Crisis," European Economy - Economic Papers 2008 - 2015 425, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

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    More about this item

    Keywords

    Asymmetric information; Capital flows; Liquidity crisis;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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