Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins
The authors examine the nature of these flows and the factors affecting foreign investors’ decision
Abstract
Motivated by the rise in capital flows to low-income countries (LICs), the authors examine the nature of these flows and the factors affecting foreign investors’ decision. Recognizing the presence of fixed investment costs, they analyze capital flows at both intensive and extensive margins. To fix ideas, they set out by constructing a rich model of capital flows that incorporates agents making portfolio investment and consumption decisions along with heterogenous firms deciding on production choices. Subsequently, they seek to map the main predictions of the model to estimating relationships by using a two-tier econometric framework with cross-sectional dependence. Main finding is that market entry costs are statistically and economically very detrimental to LICs, and that portfolio flows act as a substitute for direct investment in the extensive margin when entry costs are prohibitively high.
This work is part of the ‘Macroeconomics in Low-income countries’ programme
Citation
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Juliana Araujo, Povilas Lastauskas, Chris Papageorgiou (2016) Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins. IMF
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Juliana D. Araujo & Povilas Lastauskas & Chris Papageorgiou, 2017. Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins, Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(7), pages 1517-1554, October.