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Familiarity Breeds Investment: Migrant Networks and Cross-Border Capital
Unformatted Document Text:  25 the substantive effect for FDI is almost twice that for portfolio investment. This is consistent with our expectations: as portfolio investment represents a more homogenous opportunity set, private information provided by migrant networks becomes increasingly valuable for investors evaluating more heterogeneous options. V. Conclusion: Harnessing the Diaspora Access to international capital markets is a perennial problem confronted by all countries. Students of international political economy have invested considerable time trying to understand the theoretical and empirical connections across countries and markets. One general conclusion from these efforts is that information asymmetries represent a large cost to cross-border economic transactions. We have demonstrated that migrant networks— connections between co-ethnics across countries—play an important role in decreasing asymmetries and in promoting portfolio investment. And we have presented evidence that migrant networks do this by providing information about investment opportunities that exist across countries. Given that migrant networks serve as a conduit for international investment flows, how can governments harness their diaspora in the face of the continuing competition for capital? One mechanism that governments use to demonstrate their commitment to their external populations is through the provision of voting rights to expatriates. In table 7 we offer some suggestive evidence of the importance of these rights. In columns 1 and 3 of table 7 we include a dummy variable that is coded “1” for emigration countries (country i) that allow their expatriates to vote in national elections. Countries that allow expatriate voting generate larger portfolio investment; we find no statistically significant effect on foreign direct investment. Countries, however, differ in how they allow their expatriates to vote. Countries such as Mexico require that expatriates go to embassies or consulates in order to vote in person while

Authors: Leblang, David.
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the substantive effect for FDI is almost twice that for portfolio investment. This is consistent
with our expectations: as portfolio investment represents a more homogenous opportunity set,
private information provided by migrant networks becomes increasingly valuable for investors
evaluating more heterogeneous options.
V. Conclusion: Harnessing the Diaspora
Access to international capital markets is a perennial problem confronted by all countries.
Students of international political economy have invested considerable time trying to
understand the theoretical and empirical connections across countries and markets. One
general conclusion from these efforts is that information asymmetries represent a large cost to
cross-border economic transactions. We have demonstrated that migrant networks—
connections between co-ethnics across countries—play an important role in decreasing
asymmetries and in promoting portfolio investment. And we have presented evidence that
migrant networks do this by providing information about investment opportunities that exist
across countries.
Given that migrant networks serve as a conduit for international investment flows, how
can governments harness their diaspora in the face of the continuing competition for capital?
One mechanism that governments use to demonstrate their commitment to their external
populations is through the provision of voting rights to expatriates. In table 7 we offer some
suggestive evidence of the importance of these rights. In columns 1 and 3 of table 7 we include
a dummy variable that is coded “1” for emigration countries (country i) that allow their
expatriates to vote in national elections. Countries that allow expatriate voting generate larger
portfolio investment; we find no statistically significant effect on foreign direct investment.
Countries, however, differ in how they allow their expatriates to vote. Countries such as
Mexico require that expatriates go to embassies or consulates in order to vote in person while


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