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Journal of Economic Integration 2011 September;26(3) :499-525.
How Different are FDI and FPI Flows?: Distance and Capital Market Integration

Rabin Hattari Ramkishen S. Rajan 

Asian Development Bank
George Mason University
Copyright ©2011 Journal of Economic Integration

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.

JEL Classification: F21, F21, F23

Keywords: Distance | Foreign Direct Investment (FDI) | Foreign Portfolio Investment (FPI) | Gravity | Mergers and Acquisitions (M&As)
1. Acharya, V., H. S. Shin and T. Yorulmazer (2008), "Fire Sale FDI", Mimeo, Princeton University.
2. Aguiar, M. and G. Gopinath (2005), "Fire-sale Foreign Direct Investment and Liquidity Crises", The Review of Economics and Statistics, 87, 439-452.
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