AN ANALYSIS OF THE RE-ALLOCATION OF INVESTORS BETWEEN FOREIGN DIRECT INVESTMENT AND FOREIGN PORTFOLIO INVESTMENT AFTER EUROPEAN INTEGRATION

There are two major types of international equity flows. In the economic literature there are only few publications in the field of explaining bilateral correlation between Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) in a robust analytical framework. We consider Lipsey-Razin model to highlight the major differences between the two types of investments (FDI with better control and supervision versus FPI with less control over domestic firms). The re-allocation of investors between FDI and FPI after European integration is very interesting especially in the context of euro macroeconomic cyclicity which leads welfare parameters an early withdrawal.