Growing Up with Capital Flows
31 Pages Posted: 28 Mar 2006
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Growing Up with Capital Flows
Abstract
We examine the capital flows-domestic investment relationship for 60 developing countries from 1979 to 1999. In the 1990s, even as liberalization attracted new flows, foreign capital stimulated less domestic investment than in the preceding decade. With greater financial integration, governments accumulated more international reserves and domestic residents diversified by investing abroad. Foreign investors were also motivated by diversification objectives rather than by unmet investment needs. Inflows were channeled increasingly through portfolio flows - or through foreign direct investment with the characteristics of portfolio capital - resulting in weak investment stimulus. However, stronger policy environments strengthened the link between inflows and investment.
Keywords: Capital inflows, domestic investment, international financial integration
JEL Classification: F21, F30
Suggested Citation: Suggested Citation
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