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

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

Asian Economic Papers, 2007, vol. 6, issue 1, 74-98

Abstract: 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.

Date: 2007
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