Advertisement

Market transparency and international allocation of capital

  • Udo BrollEmail author
  • Bernhard Eckwert
  • Keith K. P. Wong
Article
  • 67 Downloads

Abstract

The paper analyzes the interaction between the domestic and foreign capital allocation of a multinational firm, and market transparency in the foreign country. Foreign capital investment is risky because of uncertainties about the host country’s institutions and market conditions. We model transparency through a publicly observable signal that provides information about the quality of institutions and market conditions in the foreign country. Under higher transparency, the public signal conveys more precise information. It is shown that higher transparency leads to more dispersion of conditionally expected foreign country risks as they become more sensitive to the realization of the public signal. We characterize conditions under which more transparency encourages or discourages foreign investment. Regardless of the volume of capital flows, the ex-ante expected total cash flow of the firm always increases with more transparency .

Keywords

International capital allocation Country risk Public information Transparency 

JEL Classification

D21 D81 R12 R50 

Notes

Acknowledgments

We would like to thank our referees for very helpfull comments and suggestions.

References

  1. Acemoglu D, Johnson S, Robinson JA (2002) Reversal of fortunes: geography and institutions in the making of the modern world income distribution. Q J Econ 117:1231–1294CrossRefGoogle Scholar
  2. Bevan AA, Estrin S (2004) The determinants of foreign direct investment into European transition economies. J Comp Econ 32:775–787CrossRefGoogle Scholar
  3. Blackwell D (1953) Equivalent comparison of experiments. Ann Math Stat 24:265–273CrossRefGoogle Scholar
  4. Brakman S, Garretsen H, van Marrewijk C, van Witteloostuijn A (2006) Nations and firms in the global economy. Cambridge University Press, Cambridge, p 2006CrossRefGoogle Scholar
  5. Broll U, Roldàn-Ponce A, Wahl JE (2010) Spatial allocation of capital: the role of risk preferences. Spat Econ Anal 5:389–398CrossRefGoogle Scholar
  6. Broll U, Roldàn-Ponce A, Wahl JE (2013) Regional investment under uncertain costs of location. Ann Reg Sci 51:645–657CrossRefGoogle Scholar
  7. Eckwert B, Zilcha I (2001) The value of information in production economies. J Econ Theory 100:172–186CrossRefGoogle Scholar
  8. Eckwert B, Zilcha I (2003) Incomplete risk sharing arrangements and the value of information. Econ Theory 21:43–58CrossRefGoogle Scholar
  9. Hayakawa K, Kimura F, Lee H-H (2013) How does country risk matter for FDI? Dev Econ 51:60–78CrossRefGoogle Scholar
  10. Hirshleifer J (1971) The private and social value of information and the reward to inventive activity. Am Econ Rev 61:561–574Google Scholar
  11. Hirshleifer J (1975) Speculation and equilibrium: information, risk and markets. Q J Econ 89:519–542CrossRefGoogle Scholar
  12. Hwang S, Lee S (2015) Regional economic integration and multinational firm strategies. J Int Trade Econ Dev 24:986–1013CrossRefGoogle Scholar
  13. Janeba E (2002) Attracting FDI in a politically risky world. Int Econ Rev 43:1127–1154CrossRefGoogle Scholar
  14. Kihlstrom RE (1984) A bBayesianayesian exposition of Blackwell’s theorem on the comparison of experiments. In: Boyer M, Kihlstrom RE (eds) Bayesian models of economic theory. Elsevier, New York, pp 13–31Google Scholar
  15. Krebs T (2005) Fundamentals, information, and internatioal capital flows: a welfare analysis. Euro Econ Rev 49:579–598CrossRefGoogle Scholar
  16. Lucas RE (1990) Why doesn’t capital flow from rich to poor countries? Am Econ Rev 80:92–96Google Scholar
  17. Mackinnon D, Cumbers A (2007) An introduction to economic geography, globalization, uneven development and place. Pearson, HarlowGoogle Scholar
  18. Markusen JR (2002) Multinational firms and the theory of international trade. MIT Press, CambridgeGoogle Scholar
  19. Navaretti GB, Venables AJ (2004) Multinational firms in the world economy. Princeton University Press, PrincetonGoogle Scholar
  20. Schlee E (2001) The value of information in efficient risk-sharing arrangements. Am Econ Rev 91:509–524CrossRefGoogle Scholar
  21. Vuksic G (2014) Developing countries in competition for foreign investment. J Int Trade Econ Dev 22:351–376CrossRefGoogle Scholar
  22. Wong KP (2006) Foreign direct investment and forward hedging. J Multinatl Financ Manag 16:459–474CrossRefGoogle Scholar

Copyright information

© The Japan Section of the Regional Science Association International 2018

Authors and Affiliations

  • Udo Broll
    • 1
    Email author
  • Bernhard Eckwert
    • 2
  • Keith K. P. Wong
    • 3
  1. 1.Department of Business and Economics, School of International Studies (ZIS)Technische Universität DresdenDresdenGermany
  2. 2.Department of EconomicsBielefeld UniversityBielefeldGermany
  3. 3.Faculty of Business and EconomicsThe University of Hong KongHong KongChina

Personalised recommendations