Capital Flows and Institutions

Deniz Igan, Alexandre Lauwers and Damien Puy

No 17527, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Consistent with an institutional quality channel of capital flows, we show that industries that are more dependent on ‘‘good’’ institutions grow relatively more after foreign capital flows into the private sector. The effects are stronger in countries further away from the institutional frontier, but they disappear and even turn negative in countries with very low institutional quality. Institution-dependent industries grow, however less when capital flows to the official sector. Our findings support the view that foreign investors can be, under certain conditions, a catalyst for institutional reform and that the relaxation of government budget constraints generally weakens structural reform incentives.

Keywords: Capital flows; Institutions; Manufacturing; Institutional dependence (search for similar items in EconPapers)
JEL-codes: E02 F33 F60 G15 O43 (search for similar items in EconPapers)
Date: 2022-08
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