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Capital Account Liberalization and Foreign Direct Investment

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  • Ilan Noy

    ()
    (Department of Economics, University of Hawaii at Manoa)

  • Tam B. Vu

    ()
    (Department of Economics, University of Hawaii at Hilo)

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Abstract

We examine the impact of capital account policies on FDI inflows. Using an annual panel dataset of 83 developing and developed countries for 1984-2000, we find that capital account openness is positively but only very moderately associated with the amount of FDI inflows after controlling for other macroeconomic and institutional measures. To a large extent, other country characteristics seem to determine FDI inflows instead of capital account policies. Furthermore, we find that capital controls are easily circumvented in corrupt and politically unstable regimes. We conclude that liberalizing the capital account is not sufficient to generate increases in inflows unless it is accompanied by a lower level of corruption or a decrease in political risk.

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Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 200708.

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Length: 33 pages
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:hai:wpaper:200708

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Keywords: Foreign direct investment; capital controls; capital flows; capital account liberalization;

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Cited by:
  1. Celine Azemar & Julia Darby & Rodolphe Desbordes & Ian Wooton, 2012. "Market Familiarity and the Location of South and North MNEs," Economics and Politics, Wiley Blackwell, Wiley Blackwell, vol. 24(3), pages 307-345, November.
  2. José-Antonio Monteiro & Madina Kukenova, 2008. "Does Lax Environmental Regulation Attract FDI When Accounting For "Third-Country" Effects?," IRENE Working Papers, IRENE Institute of Economic Research 08-01, IRENE Institute of Economic Research.
  3. Iorio, Francesca Di & Fachin, Stefano, 2014. "Savings and investments in the OECD, 1970–2007: A test of panel cointegration with regime changes," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 59-76.
  4. Giofré, Maela, 2013. "International diversification: Households versus institutional investors," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 145-176.
  5. Reece, Christopher & Sam, Abdoul G., 2012. "Impact of Pension Privatization on Foreign Direct Investment," World Development, Elsevier, vol. 40(2), pages 291-302.
  6. Dilip K. Das, 2010. "Financial globalization: a macroeconomic angle," Journal of Financial Economic Policy, Emerald Group Publishing, Emerald Group Publishing, vol. 2(4), pages 307-325, December.

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