International Journal of Economic Behavior and Organization

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Capital Heterogeneity, Entrepreneurship, and Two-way Capital Flows

Received: Oct. 21, 2019    Accepted:     Published: Dec. 03, 2019
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Abstract

This paper analyzes the drivers of Two-way Capital Flow Phenomenon in many developing countries where flows of Portfolio Investment and Direct Investment across borders demonstrate opposite directions. The paper attempts to argue that the scarcity of entrepreneurs in less developed countries, who enhance firm productivity through unobservable (and thus not contractible) entrepreneurship effort, is an essential source of two-way capital flows. Building upon the framework of venture capital studies, this paper shows in a simple model that the lack of entrepreneurs would leave some domestic investment opportunities forgone, resulting in lower investment, lower interest rate, and lower savings compared optimality. Allowing foreign entrepreneurs to raise money from the domestic financial market in the form of portfolio investment outflow and then to invest in the domestic firms in the form of direct investment inflow would help alleviate the situation. In this regard, two-way capital flows bring domestic economy benefit of learning through opening-up.

DOI 10.11648/j.ijebo.20190704.12
Published in International Journal of Economic Behavior and Organization ( Volume 7, Issue 4, December 2019 )
Page(s) 64-69
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Entrepreneurship, Two-way Capital Flows, Portfolio Investment, Direct Investment

References
[1] Basu, A. K, and Chau, N. H. “A Risk-Based Rationale for Two-Way Capital Flows: Why Do Capital Flights and Inward Foreign Direct Investments Co-Exist?” International Review of Economics & Finance 16 (1): 37–59. 2007.
[2] Ju, J., and Wei S., “Domestic Institutions and the Bypass Effect of Financial Globalization.” American Economic Journal: Economic Policy 2 (4): 173–204. Jul. 2010.
[3] Wang, P., Wen Y., and Xu Z. “Two-Way Capital Flows and Global Imbalances.” The Economic Journal 127 (599): 229-269. Feb. 2017.
[4] Jones, R. W., Neary J. P., and Ruane F. P. R. “Two-Way Capital Flows: Cross-Hauling in a Model of Foreign Investment.” Journal of International Economics 14 (3-4): 357–66. May 1983.
[5] Mendoza, E. G, Quadrini, V. and Rios-Rull J. “Financial Integration, Financial Development, and Global Imbalances.” Journal of Political Economy 117 (3): 371–416. Jun. 2009.
[6] Polo, M. C. and Villar, A. D. "A Portfolio-Choice Model to Analyze the Recent Gross Capital Flows between Canada and the US." Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 1901, Jan, 2019.
[7] Tian, G., Peng, H., and Niu, L. "Two-Way Capital Flows Model Based on Multi-Market Arbitrage: Empirical Analysis on Short-Term Capital Flows in China." International Conference on Management and Service Science, 1-4, 2009.
[8] Antras, P., Desai, M. A., and Foley, C. F. “Multinational Firms, FDI Flows, and Imperfect Capital Markets.” The Quarterly Journal of Economics 124 (3): 1171–1219. Aug. 2009.
[9] Holmes, T. J., McGrattan E. R., and Prescott E. C. “Quid Pro Quo: Technology Capital Transfers for Market Access in China.” The Review of Economic Studies, 82(3): 1154-1193. Jul. 2008.
[10] Anyangah, J. O. “Financing Investment in Environmentally Sound Technologies: Foreign Direct Investment versus Foreign Debt Finance,” Resource and Energy Economics 32 (3): 456–75. Aug. 2010.
[11] Athreye, S., and Kapur S. “Capital and Technology Flows: Changing Technology Acquisition Strategies in Developing Countries,” in The Handbook of Global Science, Technology, and Innovation, John Wiley & Sons, 2015, 191-211.
[12] Brezis, E. S., and Tsiddon. D., “Economic Growth, Leadership and Capital Flows: The Leapfrogging Effect.” Journal of International Trade & Economic Development 7 (3): 261–77. Sept. 1998.
[13] Casamatta C. “Financing and Advising: Optimal Financial Contracts with Venture Capitalists.” The Journal of Finance 58 (5): 2059–86. Sept. 2003.
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  • APA Style

    Guangtao Xia, Chi Zhang, Ke Gao. (2019). Capital Heterogeneity, Entrepreneurship, and Two-way Capital Flows. International Journal of Economic Behavior and Organization, 7(4), 64-69. https://doi.org/10.11648/j.ijebo.20190704.12

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    ACS Style

    Guangtao Xia; Chi Zhang; Ke Gao. Capital Heterogeneity, Entrepreneurship, and Two-way Capital Flows. Int. J. Econ. Behav. Organ. 2019, 7(4), 64-69. doi: 10.11648/j.ijebo.20190704.12

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    AMA Style

    Guangtao Xia, Chi Zhang, Ke Gao. Capital Heterogeneity, Entrepreneurship, and Two-way Capital Flows. Int J Econ Behav Organ. 2019;7(4):64-69. doi: 10.11648/j.ijebo.20190704.12

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  • @article{10.11648/j.ijebo.20190704.12,
      author = {Guangtao Xia and Chi Zhang and Ke Gao},
      title = {Capital Heterogeneity, Entrepreneurship, and Two-way Capital Flows},
      journal = {International Journal of Economic Behavior and Organization},
      volume = {7},
      number = {4},
      pages = {64-69},
      doi = {10.11648/j.ijebo.20190704.12},
      url = {https://doi.org/10.11648/j.ijebo.20190704.12},
      eprint = {https://download.sciencepg.com/pdf/10.11648.j.ijebo.20190704.12},
      abstract = {This paper analyzes the drivers of Two-way Capital Flow Phenomenon in many developing countries where flows of Portfolio Investment and Direct Investment across borders demonstrate opposite directions. The paper attempts to argue that the scarcity of entrepreneurs in less developed countries, who enhance firm productivity through unobservable (and thus not contractible) entrepreneurship effort, is an essential source of two-way capital flows. Building upon the framework of venture capital studies, this paper shows in a simple model that the lack of entrepreneurs would leave some domestic investment opportunities forgone, resulting in lower investment, lower interest rate, and lower savings compared optimality. Allowing foreign entrepreneurs to raise money from the domestic financial market in the form of portfolio investment outflow and then to invest in the domestic firms in the form of direct investment inflow would help alleviate the situation. In this regard, two-way capital flows bring domestic economy benefit of learning through opening-up.},
     year = {2019}
    }
    

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    AU  - Guangtao Xia
    AU  - Chi Zhang
    AU  - Ke Gao
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    JF  - International Journal of Economic Behavior and Organization
    JO  - International Journal of Economic Behavior and Organization
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    AB  - This paper analyzes the drivers of Two-way Capital Flow Phenomenon in many developing countries where flows of Portfolio Investment and Direct Investment across borders demonstrate opposite directions. The paper attempts to argue that the scarcity of entrepreneurs in less developed countries, who enhance firm productivity through unobservable (and thus not contractible) entrepreneurship effort, is an essential source of two-way capital flows. Building upon the framework of venture capital studies, this paper shows in a simple model that the lack of entrepreneurs would leave some domestic investment opportunities forgone, resulting in lower investment, lower interest rate, and lower savings compared optimality. Allowing foreign entrepreneurs to raise money from the domestic financial market in the form of portfolio investment outflow and then to invest in the domestic firms in the form of direct investment inflow would help alleviate the situation. In this regard, two-way capital flows bring domestic economy benefit of learning through opening-up.
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Author Information
  • PBC School of Finance, Tsinghua University, Beijing, P. R. China

  • Institute of Chinese Economic Practice and Thinking, Tsinghua University, Beijing, P. R. China

  • Bank of Weifang, Weifang, P. R. China; School of Social Sciences, Tsinghua University, Beijing, P. R. China

  • Section