Social and Behavioral Sciences Commons^™

Foreign Direct Investment And Foreign Portfolio Investment Under Asymmetric Information, Ruanjai Suwantaradon

Research Collection School Of Economics

This paper develops a model of international capital flows when there is asymmetric information between foreign investors and domestic managers. Direct investors have a direct influence on the management, thus overcoming agency and information problems. This information advantage, however, comes at the cost of having to acquire management expertise. The tradeoff between management costs and the costs of asymmetric information consequently determines the level and composition of a country’s international capital flows. Analyzing how this tradeoff changes with economic conditions in a country, the model can qualitatively capture the experiences of many crisis countries during the 1990s. Specifically, the model …