How Different are FDI and FPI Flows?: Does Distance Alter the Composition of Capital Flows?

Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 09/2011

(Published in Journal of Economic Integration, Volume 26, Issue 3, September 2011, Pages 499-525. New title: "How Different are FDI and FPI Flows?: Distance and Capital Market Integration")

32 Pages Posted: 30 Mar 2011 Last revised: 22 Jul 2022

Date Written: March 28, 2011

Abstract

This working paper was written by Rabin Hattari (Asian Development Bank) and Ramkishen S. Rajan (George Mason University and Institute of Southeast Asian Studies).

The availability of bilateral capital flows between countries has given rise to a number of papers attempting to understand trends and determinants of capital flows between country pairs. Almost without exception, the papers find that the gravity model fits the data quite well. Specifically, while economic sizes of the host and source (measured by GDP, population etc) appear to positively impact bilateral flows in most cases, distance - broadly proxying some sort of transactions and/or information frictions - stands out as consistently hindering all types of capital flows. But does greater distance hinder both foreign portfolio investment (FPI) and foreign direct investment (FDI) flows equally? In other words, does distance change the composition of capital flows? This is the specific question that this paper focuses on, differentiating between total FDI, FDI via mergers and acquisitions (M&As) and FPI.

Keywords: Distance, Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), Gravity, Mergers and Acquisitions (M&As)

JEL Classification: F21, F23

Suggested Citation

Institute for Monetary and Financial Research, Hong Kong, How Different are FDI and FPI Flows?: Does Distance Alter the Composition of Capital Flows? (March 28, 2011). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 09/2011, (Published in Journal of Economic Integration, Volume 26, Issue 3, September 2011, Pages 499-525. New title: "How Different are FDI and FPI Flows?: Distance and Capital Market Integration"), Available at SSRN: https://ssrn.com/abstract=1797466 or http://dx.doi.org/10.2139/ssrn.1797466

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