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External Finance and Investment Climate in East Asia and Other Emerging Markets: What Really Matters?


  • Shoko Negishi

    (Associate Professor, Faculty of Policy Studies, Doshisha University, Karasuma-Higashi-iru, Imadegawa-dori Kamigyo-ku, Kyoto 602-8580 Japan)


Developing countries are facing new competitive challenges to attract sufficient external financing to sustain their growth. This paper attempts to answer the question: How can a country attract more long-term, stable foreign investment? Our study shows the increasing role of a political risk factor as a driver of foreign direct investment (FDI) inflows, and suggests that reduced financial risk after the East Asian crisis might have led to a substitution of FDI with capital market flows. Our study also shows the importance of fostering sound regulatory systems and good institutions for attracting FDI, for example, establishing a stable government that implements economic policy effectively and reduces uncertainty associated with internal disorder and a lack of democratic regime. The simulation exercise suggests that an improved investment climate would increase FDI by 7 percent and would benefit China most. (c) 2007 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.

Suggested Citation

  • Shoko Negishi, 2007. "External Finance and Investment Climate in East Asia and Other Emerging Markets: What Really Matters?," Asian Economic Papers, MIT Press, vol. 6(1), pages 74-98, Winter.
  • Handle: RePEc:tpr:asiaec:v:6:y:2007:i:1:p:74-98

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    References listed on IDEAS

    1. Jacob Gyntelberg & Guonan Ma & Eli M Remolona, 2005. "Corporate bond markets in Asia," BIS Quarterly Review, Bank for International Settlements, December.
    2. Mitchel Y. Abolafia (ed.), 2005. "Markets," Books, Edward Elgar Publishing, number 2788.
    3. William R. White, 2004. "Are changes in financial structure extending safety nets?," BIS Working Papers 145, Bank for International Settlements.
    4. Robert N McCauley, 2003. "Unifying government bond markets in East Asia," BIS Quarterly Review, Bank for International Settlements, December.
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