The Pecking Order of Cross-Border Investment

By Christian Daude, Marcel Fratzscher. Social Science Research Network, 2006

282 citations recorded by the source corpus.

Is there a pecking order of cross-border investment in that countries become financially integrated primarily through some types of investment rather than others? Using a novel database of bilateral capital stocks for all types of investment - FDI, portfolio equity securities, debt securities as well as loans - for a broad set of 77 countries, we show that such a pecking order indeed exists. Motivated by the theoretical work on the capital structure of firms, the paper focuses on two key determinants of this pecking order: information frictions and the quality of host country institutions. Overall, we find that in particular FDI, and to some extent also loans, are substantially more sensitive to information frictions than investment in portfolio equity and debt securities. We also show that the share as well as the size of FDI that a country receive are largely insensitive to institutional factors in host countries, while portfolio investment is by far the most sensitive to the quality of institutions. This provides new evidence in favor of some hypotheses but contradicts others put forward in the theoretical literature on trade in financial assets. JEL Classification: F34, G11, F21

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/7f0547065bbfea5cb5cc3504816b6b742af0d2c3

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Citations in the corpus

Corruption and Cross-Border Investment in Emerging Markets: Firm-Level Evidence (2009, background): “Moreover, Daude and Fratzscher (2008) have shown that flows of foreign direct investment (FDI) are “substantially more sensitive to information frictions than investment in portfolio equity and debt securities.””
Policy Uncertainty, Irreversibility, and Cross-Border Flows of Capital (2013, unknown): “…the University of Sydney, the University of Technology, Sydney, 2012 China International Conference in Finance, 2012 TCFA Best Paper Symposium, and Conference on Policy Uncertainty and its Economic Implications by Becker FriedmanInstitute at the University of Chicago for helpful comments.”
The Global Crisis and Equity Market Contagion: The Global Crisis and Equity Market Contagion (2014, unknown): “…of newspapers from the United States (in U.S. dollars) to domestic 10 GDP, we also include the most commonly used proxy of information asymmetry in the literature on capital flows, namely the geographic distance of a country to the United States (Portes and Rey (2005); Daude and Fratzscher (2008)).”
Home bias in open economy financial macroeconomics (2013, unknown): “LHBi = 1− Share of Foreign Banking Assets in Country i Banking Assets Foreign Banking Assets as a share of Total Foreign Outstanding Loans (44)”
What Explains Global Exchange Rate Movements during the Financial Crisis (2009, methodology): “There are various drawbacks to the CPIS data, which have discussed by e.g. Lane and Milesi-Ferretti (2003), Warnock (2006) and Daude and Fratzscher (2008).”
FDI promotion through bilateral investment treaties: more than a bit? (2010, background): “…perhaps, results may depend on whether (and in which way) the possible endogeneity of BITs is taken into account.7 The gravity model results of Daude and Fratzscher (2006) provide further reason to carefully test for the robustness of empirical estimates on the impact of BITs on FDI inflows.”
Public Investment in Developing Countries: A Blessing or a Curse? (2008, background): “See e.g. Calvo et al (2001), Daude and Fratzscher (2008) and Fernandez-Arias (1996) on this issue.”
The Quality of Institutions and Foreign Direct Investment (2007, background): “La Porta et al. (1999) find that the origin of the legal code is an important and significant determinant of a series of government institutions and economic outcomes.”