The Global (Mis)Allocation of Capital

Bertaut, Carol C.; Curcuru, Stephanie E.; Faia, Ester; Gourinchas, Pierre-Olivier

doi:10.17016/IFDP.2024.1399

Working Paper

The Global (Mis)Allocation of Capital

Abstract: The allocative efficiency of capital flows is one of the oldest and most contentious questions. We answer it by matching cross-border securities holdings reported in the US external statistics from 1995 to 2022 with the corresponding firm-level measures of allocative efficiency. We find that US investors tilt their international equity investment toward firms with high MRPK and markups, thereby fostering their potential for growth. Foreign investors tilt their holdings toward US firms with high productivity and intangible capital. A horse race shows that productivity is the best predictor of foreign investment in US firms and MRPK for US investment in foreign firms. Both US and foreign firms that receive more international funding increase spending on intangible capital, and foreign firms also increase tangible capital. The results are stronger for more productive firms.

Keywords: Productivity; Capital allocation; capital flows;

JEL Classification: E20; F30; F60;

https://doi.org/10.17016/IFDP.2024.1399