Gains from FDI inflows with incomplete information

The paper develops an international macroeconomic model of FDI flows with a unique feature: a hands-on management ability to react in real time to changing economic environments. Anticipating this advantage, foreign direct investors can outbid other investors in a certain industry in which they specialize in the source country. The model can explain both two-way FDI flows among developed countries and one-way FDI flows from developed to developing countries. The unique gains from FDI to the host country stem from the increased efficiency of domestic investment.