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FDI, debt and capital controls

Salvatore Dell'Erba and Dennis Reinhardt ()

Journal of International Money and Finance, 2015, vol. 58, issue C, 29-50

Abstract: We examine the link between financial sector FDI flows, banking debt flows and capital controls in emerging market economies during episodes of large gross capital inflows – surges. We find that FDI surges in the financial sector behave remarkably similar to surges in banking debt flows: they are associated with boom–bust cycles in GDP and expansions of credit in foreign currency, unlike surges in FDI in the non-financial sectors. Moreover, global and contagion factors have a strong explanatory power in explaining surges in financial FDI and banking debt flows, compared to surges in non-financial sectors. But capital controls have the opposite effect on the two types of flows: restrictions on short-term debt flows tend to decrease the likelihood of surges in banking debt flows but increase the likelihood of surges in financial sector FDI.

Keywords: Foreign direct investment; Surges; Banking flows; Capital controls; Emerging market economies (search for similar items in EconPapers)
JEL-codes: F21 F32 (search for similar items in EconPapers)
Date: 2015
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Handle: RePEc:eee:jimfin:v:58:y:2015:i:c:p:29-50