Economic Policy, Institutions, and Capital Flows: Portfolio and Direct Investment Flows in Developing Countries

Scholars examining the cross-national mobility of capital have followed two distinct paths. Economists tend to focus on the determinants and economic effects of cross-country capital movements while political scientists largely concentrate on the political impact of capital mobility. This study fill...

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Bibliographic Details
Published in:International studies quarterly 2006-09, Vol.50 (3), p.681-704
Main Author: AHLQUIST, JOHN S.
Format: Article
Language:English
Subjects:
Capital
Capital flow
Capital investments
Capital mobility
Developing Countries
Economic Policy
Economists
Federal budget deficit
Financial investments
Financial portfolios
Fiscal Policy
Foreign direct investment
Government Policy
Gross domestic product
International monetary relations
Investment
Investment risk
Investments
Investors
LDCs
Liberalization
Market Economy
Mobility
Political conditions
Polities
Portfolio management
Reform
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Summary:Scholars examining the cross-national mobility of capital have followed two distinct paths. Economists tend to focus on the determinants and economic effects of cross-country capital movements while political scientists largely concentrate on the political impact of capital mobility. This study fills an important gap in the literature by examining the effects of economic policy outcomes on capital inflows to developing countries, explicitly comparing the reactions of portfolio and direct investors. I find that portfolio investors are in fact sensitive to past government behavior and fiscal policy outcomes; portfolio investors reallocate funds as new information about government policy becomes available. Direct investors, on the other hand, are not sensitive to macrolevel economic policy outcomes but are concerned with political institutions. Countries with more stable and democratic political institutions attract more FDI. These findings have implications for developing country governments as they consider the sequence of market liberalizing reforms.
ISSN:0020-8833
1468-2478
DOI:10.1111/j.1468-2478.2006.00420.x