On the Drivers of FDI and Portfolio Investment: A Simultaneous Equations Approach
This paper assesses the drivers of Foreign Direct Investment (FDI) and portfolio investment using simultaneous equations, which control for the correlation between the two components of private capital flows. The results show that in addition to infrastructure and financial development, capital control and economic growth significantly explain private capital flows in developing countries. The paper also highlights that the impact of financial development on portfolio investment is nonlinear. Indeed, lax monetary policy and excessive credit provision could weaken the financial system and significantly reduce portfolio investment flows in the long run.
Volume (Year): 26 (2012)
Issue (Month): 1 (November)
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