The Role of Information in Driving FDI Flows: Host-Country Tranparency and Source Country Specialization,” NBER working paper 9662

We develop a simple information-based model of FDI flows. On the one hand, the abundance of “intangible " capital in specialized industries in the source countries, which presumably generates expertise in screening investment projects in the host countries, enhances FDI flows. On the other hand, host-country corporate-transparency diminish the value of this expertise, thereby reducing the flow of FDI. Empirical evidence (from a sample of 12 source countries and 45 host countries over the 1980s and 1990s) analyzed in a gravity-equation model, provides support to the theoretical hypotheses. The model also demonstrates that the gains for the host country from foreign direct investment (over foreign portfolio investment (FPI)) are reflected in a more efficient size o