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This paper develops a two% country general equilibrium model which analyzes the composition of equity flows (direct vs portfolio) across two countries in the presence of heterogeneity in liquidity risk and asymmetric information about the investment productivity. Direct investment is characterized by higher profitability and private information about investment productivity, while portfolio investment provides greater risk diversification. I demonstrate that there is a possibility of multiple equilibria due to strategic complementarities in choosing direct investment. I analyze the effect of an increase in the liquidity risk on the composition of foreign investment. If there is a unique equilibrium then higher liquidity risk leads to a higher level of foreign direct investment (FDI). If, however, there are multiple equilibria then higher liquidity risk may leads to the opposite effect: a decine of FDI. In this case, an outflow of FDI is induced by self% fulfilling expectations. The ambivalent effect of increased liquidity risk on equity flows can be related to empirically observed patterns of foreign investment during liquidity crises.