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Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins

Juliana Araujo (), Povilas Lastauskas and Chris Papageorgiou ()
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Juliana Araujo: International Monetary Fund

No 37, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: Motivated by the rise in capital flows to low-income countries (LICs), we examine the nature of these flows and the factors affecting foreign investors' decision. Recognizing the presence of fixed investment costs, we analyze capital flows at both intensive and extensive margins. To fix ideas, we resort to the gravity literature for the estimating relationships which we embed into a two-tier econometric framework with cross-sectional dependence. Our main finding is that market entry costs are statistically and economically very detrimental to LICs. We also obtain the gravity-type relationship for the destination income unconditionally but not after conditioning on relevant variables, as well as establish labor productivity as a robust attractor of capital inflows.

Keywords: Bilateral capital flows; foreign direct investment; portfolio flows; low-income countries; extensive and intensive margins; cross-sectional dependence (search for similar items in EconPapers)
JEL-codes: C33 C34 F21 F62 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev and nep-int
Date: 2016-12-01
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Related works:
Journal Article: Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins (2017) Downloads
Working Paper: Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins (2015) Downloads
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