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Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins

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  • Juliana Araujo
  • Povilas Lastauskas
  • Chris Papageorgiou

Abstract

The capital flows network has changed substantially, bringing new investors and target economies into play. Related, a recent intensification of capital flows to low income countries (LICs) has posed a number of questions. Most importantly, the very nature of those flows and important factors affecting foreign investors decision which can ultimately affect growth prospects of low income countries (together with an issue of sustainability) remain open for an academic probe. Due to an existence of a share of costs which is fixed in nature, there is a need to analyze capital flows and their evolution at two margins: intensive and extensive. This paper presents a parsimonious theoretical account that is consequently mapped into an econometric framework where we allow for two-tier decisions and cross-sectional dependence. Results indicate that market entry costs affect investment decisions pertinent to the LICs, consistently with the static theory. However, persistence in extensive margin eliminates this effect once dynamics is allowed for.

Suggested Citation

  • Juliana Araujo & Povilas Lastauskas & Chris Papageorgiou, 2015. "Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins," Cambridge Working Papers in Economics 1502, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:1502
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    2. Li, Fengchun & Wu, Siying, 2023. "Impacts of home country's institutional environment on OFDI dual margin," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 54-67.
    3. Yasumasa Morito & Kenichi Ueda, 2024. "Bilateral Lucas Paradox," CARF F-Series CARF-F-581, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

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    More about this item

    Keywords

    Bilateral Capital Flows; Foreign Direct Investment; Portfolio Flows; Developing Economies; Extensive and Intensive Margins; Heterogeneous Panels; Cross-Sectional Dependence; Copulae.;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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