Economic Policy, Institutions, and Capital Flows: Portfolio and Direct Investment Flows in Developing Countries

2006/09/01 by JOHN S. AHLQUIST, John S. Ahlquist · 227 citations
Business, Management and Accounting · Social Sciences · #Capital (architecture) #Capital market #Corporate Finance and Governance #Developing country #Economic growth #Economics #Finance #Foreign direct investment #Government (linguistics) #International Development and Aid #International economics #Macroeconomics #Political risk #Political science #Politics #Portfolio #Portfolio investment #State Capitalism and Financial Governance

paper · pdf · doi:10.1111/j.1468-2478.2006.00420.x

published in International Studies Quarterly 50(3), 681-704 (Oxford University Press)

openalex publication_date 2006/09/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/26

Abstract

Scholars examining the cross-national mobility of capital have followed two distinct paths. Economists tend to focus on the determinants and economic effects of cross-country capital movements while political scientists largely concentrate on the political impact of capital mobility. This study fills an important gap in the literature by examining the effects of economic policy outcomes on capital inflows to developing countries, explicitly comparing the reactions of portfolio and direct investors. I find that portfolio investors are in fact sensitive to past government behavior and fiscal policy outcomes; portfolio investors reallocate funds as new information about government policy becomes available. Direct investors, on the other hand, are not sensitive to macrolevel economic policy outcomes but are concerned with political institutions. Countries with more stable and democratic political institutions attract more FDI. These findings have implications for developing country governments as they consider the sequence of market liberalizing reforms.

Citations

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