منطق مبتنی بر ریسک برای جریان سرمایه دو طرفه : چرا پروازهای سرمایه و سرمایه گذاری مستقیم خارجی به سمت داخل شرکت وجوددارد ؟

This paper develops a positive theory of two-way capital flows—the outward flight of productive capital, and inward foreign direct investment that acquires ownership of local production units. The model exploits insights from decision-making under uncertainty, and traces out how entrepreneurial incentive to engage in risky production impacts equilibrium returns on capital. Contrary to expectation, productive assets tend to flow from capital-poor to capital-rich economies, while foreign direct investment follows the reversed pattern. By examining the nature of optimal interventions, the paper also demonstrates the inherent conflict of interests between host and source countries engaged in capital market liberalization.

Developing countries experiencing massive flights of domestic capital and productive assets abroad are nevertheless frequently major recipients of foreign direct investment. The two faces of this phenomenon of two-way capital flows involve (i) the flight of relatively liquid capital and productive assets that could have contributed to indigenous economic growth, and (ii) the inflow of foreign direct investment that shifts the benefits of ownership of local production units onto the hands of foreign entrepreneurs. Each of these challenges facing emerging economies has been studied extensively, but separately, in the capital flight and foreign direct investment literature1. As inter-related and simultaneous phenomena, however, the root causes of two-way capital flows, and their implications in terms of the welfare of host and origin countries, have nevertheless received very little theoretical attention. Yet, there are good reasons to believe that the coexistence of capital flight and foreign direct investment in the reverse direction is not simply a matter of theoretical curiosity. We take thirty-seven countries under the two regional groupings of Latin American and the Caribbean2, and East Asia and Pacific3 from 1989 to 1999 as cases in point. Members of both sets of countries underwent substantial capital market liberalization throughout the 1990s, as can be seen from the more than many-fold increase in inward foreign direct investment on a per capita basis (Table 1). The size of foreign direct investment is defined here as net inflows of investment that acquire a lasting management interest in local enterprises (10% or more of voting stock)4. We compute the magnitude of capital flights from these countries during the same time period. These estimates employ the residual method, where capital flight is computed as the residual difference between capital inflows and recorded foreign-exchange outflows. Capital inflow is the sum of the change in total external debt outstanding and net foreign direct investment. Foreign-exchange outflows are given by the current account deficit and net additions to reserves and related items (Claessens & Naude, 1993). Fig. 1 plots all instances of positive capital flight against contemporaneous foreign direct investment inflow of the corresponding country respectively in the two regions5. Evidently, an overwhelming majority (94%) of all instances of positive capital flights from the thirty seven countries during 1989–1999 are accompanied by strictly positive levels of inward foreign direct investment.6 Table 1 and Fig. 2 depict the annual regional averages of per capita total capital flight and per capita inward foreign direct investments during 1989–1999 (Fig. 2).7 As shown, intertemporal increases in inward foreign direct investment exist alongside corresponding increases in capital flight originating from the two regions. Indeed, members of Latin American countries have, on average, higher levels both of per capita capital flight and inward forward direct investment relative to members of East Asian countries. These observations beg an important question, namely, why do countries that suffer from massive capital flight nevertheless appeal to foreign investors in search of alternative production locations? The objective of this paper is accordingly to examine a theoretical framework based on which a rationale behind these observations can be understood. In the context of the model, the welfare implications of cross-hauling of capital host and origin countries, along with the scope for capital market and investment policies will also be examined. Specifically, we consider a simple model of two-way capital flows between two small open economies (South and North). The key insights of the basic framework are two-fold, having to do with (i) entrepreneurial incentives and production decision making in the presence of uncertainty and incomplete risk markets at the firm level and (ii) the associated competitively determined returns to capital in general equilibrium. Specifically, production decision making in the presence of uncertainty gives rise to a risk-bearing fee, which shows up in the form of a strictly positive price-cost margin. Thus, if entrepreneurial preferences are of the decreasing absolute risk aversion variety, the risk-induced price-unit cost margin that prevails in a capital-poor economy is strictly higher than an otherwise identical capital-rich economy. Perhaps more importantly, the desired price-unit cost margin effectively acts as a tax on the production of the risky output, and puts downward pressure on the derived demand for productive inputs, including capital. This implies, therefore, that all else equal, capital outflows originate from capital-poor economies as a result of the lower returns to capital there. Due to precisely the same set of circumstances–risky production and incomplete risk markets–entrepreneurs in the capital-rich North have an incentive to locate production units in the South, in order to exploit the additional profits that can be extracted in the presence of a strictly larger price-unit cost margin. In this context of risk-induced cross-hauling of capital, a second objective of this paper is to examine the optimal capital import and export policies of the emerging South, along with those of the North. In particular, we discover an inherent conflict of interest between the two countries, in the sense that unilateral policy making on the part of the South implies a pair of optimal investment taxes, which deter the flow of capital from both directions. Capital exports from the South are to be deterred to safeguard the incentives of Northern entrepreneurs to locate production activities in the South. However, free inflow of Northern investors is not ideal either as it forgoes the possibility of using taxes to extract the rents that Northern entrepreneurs earn in the South.8 Meanwhile, standard monopsonistic buyer arguments call for a Northern tax on the inflow of capital from the South. The correct policy towards Northern entrepreneurs who face risky profit prospects operating in the South, however, is a subsidy rather than a tax. These results have clear implications regarding the potential difficulties in formulating international investment rules in the context of the World Trade Organization, or regional agreements such as NAFTA/FTAA, particularly when the two sides of the negotiating table consist respectively of capital-rich and capital-poor countries. The basic framework of this paper has its origins in the literature on international trade under uncertainty, wherein the main focus has been to ascertain whether or not standard trade theorems continue to apply in a setting with uncertainty (Chau, 1998, Helpman & Razin, 1978 and Mayer, 1976). In addition, the international factor mobility literature has recently begun to study the question of two-way capital flows. However, the main focus has been on North–North interactions (Brainard, 1993, Markusen, 1995 and Markusen & Venables, 1999), whereby oligopolistic multinational firms compete in a noncooperative fashion by choice of production locations both at home and abroad. A key difference between this literature, grounded in “new trade theory”, and the model presented here is that our interests lie in understanding North–South interaction in the context of production uncertainty. In addition, we are concerned with capital flight from Southern countries in the form of assets flow that could have been channeled towards productive purposes, rather than the strategic production location decisions between oligopolistic firms per se. Another related vein of research builds on the stock market model of Diamond (1967), and is concerned with the role of international financial integration in the presence of uncertainty in general equilibrium models of international trade (Baxter & Crucini, 1995, Cole, 1988, Cole, 1993, Helpman & Razin, 1978 and Koren, 2003), building. In these studies, financial integration takes the form of international trade in (state-contingent) securities, which in turns takes on the critical function of international and/or intertemporal risk sharing. These studies raise the important point that the completeness of financial markets are critical in determining (i) the validity of basic international trade proposition; (ii) the volume of international trade in goods and (iii) and other real variables such as labor efforts. The task we undertake in this paper does not involve financial integration in asset markets, or arguments concerned risk pooling. Instead, we are concerned with the direction and policy implications of the coexistence of international movement of productive capital, alongside investment liberalization that allows entrepreneurs to undertake production decision internationally. The paper is organized as follows. Section 2 presents the basic framework in the absence of capital market liberalization, and uncovers how expected profits in risky production, along with the competitive returns to capital, are related to the capital endowment of an economy. Section 3 presents the case of two-country world in which capital markets are liberalized, and show that two-way capital flows indeed prevail in general equilibrium. Section 3 is concerned with the welfare calculus and the formulation of optimal investment policies. Section 4 contains a discussion of the basic assumptions, and broader policy implications of this exercise. Section 5 concludes.

The results in this paper highlight the implications of capital market liberalization and underscores the fact that under production uncertainty and incomplete risk markets, capital flight takes place from countries that are poorly endowed with capital to those that are relatively capital-rich. The basic framework exploits the insights from entrepreneurial decision making under production uncertainty in the manufacturing sector, and the general equilibrium consequence of risky production on the relative rates of returns to capital in capital-poor and capital-rich economies. The model shows that the rationale behind two-way capital flow is surprisingly simple—that the risk-bearing fee attached to risky production shows up in the form of a price-unit cost margin. In the presence of preferences that exhibit decreasing absolute risk aversion, capital-poor entrepreneurs are willing to devote a smaller share of their revenue to pay for productive inputs. The resulting downward pressure on the derived demand for capital inputs implies that other things being equal, the flight of capital originates from capital-poor countries to capital-rich countries. By the same token, the higher price-cost margin in the South induces foreign direct investment flows from the North to the South, as entrepreneurs in capital-rich economies are more likely to undertake risky production activities. In terms of welfare, the investment policies of the two countries differ considerably. In particular, whereas the revenue motive constitute the rationale behind Southern taxation of both capital inflow as well as capital outflow, the welfare maximization policy of the North actually implies that Northern investment in the South should be encouraged via subsidies, rather than deterred. These findings shed new light on the potential conflict of interests between capital-rich and capital-poor economies in the context of capital market liberalization.