Market transparency and international allocation of capital

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 transpare...

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Bibliographic Details
Published in:Asia-Pacific journal of regional science 2019-06, Vol.3 (2), p.421-429
Main Authors: Broll, Udo, Eckwert, Bernhard, Wong, Keith K. P.
Format: Article
Language:English
Subjects:
Asian Economics
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Regional/Spatial Science
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Summary: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 .
ISSN:2509-7946
2509-7954
DOI:10.1007/s41685-018-0101-5