International Financial Capital Transfers: A Transaction Cost Framework

This paper argues that a number of non-conventional types of foreign direct investments – such as free-standing firms – that fit awkwardly in models where multinational firms arise to exploit abroad their firm-specific advantages, can be explained by looking at the role of these institutions in the international transfer of financial capital. The paper develops a theory to explain why a particular form of transfer will be used based on the choice between price and hierarchical transfer on one hand, and intermediated versus non-intermediated transfer on the other. Hierarchical transfer (equity) will be favoured when transaction costs in the market for investible funds are high. Intermediation will take place when there is considerable asymmetry between savers and investors. Non-intermediated equity transfers (free-standing firms) will arise to finance projects offering no collateral (hence equity) but of low scale and known technology (hence non-intermediated).