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Do Democracies Attract Portfolio Investment? Transnational Portfolio Investments Modeled as Dynamic Network

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  • Xun Cao
  • Michael D. Ward

Abstract

For many, transnational capital is an important driving force of economic globalization. However, we know little about the political determinants for cross-border portfolio investments. Recent economic literature focuses upon information asymmetries. We move beyond this and introduce an explicitly political element into the study of international asset flows. Democratic institutions attract portfolio investments because they reduce the chances of government predatory practices. Applying a dynamic latent space model on the bilateral portfolio investment data from 2001 to 2005, we empirically examine the effects of important country-level characteristics of both exporters and importers of portfolio investments. The empirical findings suggest that democracies are often associated with higher levels of inward portfolio investments. Interestingly, we also find that portfolio investments are associated with business communities’ subjective estimate of property rights protection, but not with more comprehensive, index-based aggregate measures from international think tanks.

Suggested Citation

  • Xun Cao & Michael D. Ward, 2014. "Do Democracies Attract Portfolio Investment? Transnational Portfolio Investments Modeled as Dynamic Network," International Interactions, Taylor & Francis Journals, vol. 40(2), pages 216-245, March.
    • Handle: RePEc:taf:ginixx:v:40:y:2014:i:2:p:216-245
    DOI: 10.1080/03050629.2014.880697
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    1. Dani Rodrik, 1998. "Has Globalization Gone Too Far?," Challenge, Taylor & Francis Journals, vol. 41(2), pages 81-94, March.
    2. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2010. "The worldwide governance indicators : methodology and analytical issues," Policy Research Working Paper Series 5430, The World Bank.
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    Cited by:

    1. Xu, Hao & Li, Songsong, 2023. "What impacts foreign capital flows to China's stock markets? Evidence from financial risk spillover networks," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 559-577.
    2. Ward, Hugh & Dorussen, Han, 2015. "Public Information and Performance: The Role of Spatial Dependence in the Worldwide Governance Indicators among African Countries," World Development, Elsevier, vol. 74(C), pages 253-263.

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