Corporate Governance and the Composition of Foreign Equity Investment Inflows

Many emerging and transition economies welcome inflows of foreign equity capital as a means of augmenting the funds available for domestic capital formation. There are three main channels though which such foreign capital may be introduced into the host economy: foreign direct investment (FDI), foreign portfolio investment (FPI), and the issuance of shares by domestic firms on overseas stock exchanges. However, the relative importance of these three sources of funds varies considerably between advanced and less developed economies, with FDI typically dominating inflows of foreign capital in the latter group whilst FPI and overseas share issues are more important for the former group (Cornelius and Kogut, 2003). These empirical observations raise two important questions. First, why is so little capital introduced through FPI and overseas share issues in less developed economies? Second, does this imbalance matter?