Capital Heterogeneity, Entrepreneurship, and Two-way Capital Flows
International Journal of Economic Behavior and Organization
Volume 7, Issue 4, December 2019, Pages: 64-69
Received: Oct. 21, 2019; Published: Dec. 3, 2019
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Guangtao Xia, PBC School of Finance, Tsinghua University, Beijing, P. R. China
Chi Zhang, Institute of Chinese Economic Practice and Thinking, Tsinghua University, Beijing, P. R. China
Ke Gao, Bank of Weifang, Weifang, P. R. China; School of Social Sciences, Tsinghua University, Beijing, P. R. China
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This paper analyzes the drivers of Two-way Capital Flow Phenomenon in many developing countries where flows of Portfolio Investment and Direct Investment across borders demonstrate opposite directions. The paper attempts to argue that the scarcity of entrepreneurs in less developed countries, who enhance firm productivity through unobservable (and thus not contractible) entrepreneurship effort, is an essential source of two-way capital flows. Building upon the framework of venture capital studies, this paper shows in a simple model that the lack of entrepreneurs would leave some domestic investment opportunities forgone, resulting in lower investment, lower interest rate, and lower savings compared optimality. Allowing foreign entrepreneurs to raise money from the domestic financial market in the form of portfolio investment outflow and then to invest in the domestic firms in the form of direct investment inflow would help alleviate the situation. In this regard, two-way capital flows bring domestic economy benefit of learning through opening-up.
Entrepreneurship, Two-way Capital Flows, Portfolio Investment, Direct Investment
To cite this article
Guangtao Xia, Chi Zhang, Ke Gao, Capital Heterogeneity, Entrepreneurship, and Two-way Capital Flows, International Journal of Economic Behavior and Organization. Vol. 7, No. 4, 2019, pp. 64-69. doi: 10.11648/j.ijebo.20190704.12
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This article is an open access article distributed under the Creative Commons Attribution License ( which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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