Market transparency and international allocation of capital

  • Udo BrollEmail author
  • Bernhard Eckwert
  • Keith K. P. Wong


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 .


International capital allocation Country risk Public information Transparency 

JEL Classification

D21 D81 R12 R50 



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


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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

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