Channelling Domestic Savings into Productive Investment Under Asymmetric Information: The Essential Role of Foreign Direct Investment

Foreign direct investment (FDI) is observed to be a predominant form of capital flows to low and middle income countries with insufficiently developed capital markets. This paper analyzes the problem of channelling domestic savings into productive investment in the presence of asymmetric information between the managing owners of firms and ither portfolio stakeholders. We emphasize the crucial role played by FDI in sustaining equity-financed capital investment for economies plagued by such information problems.