Capital Controls and Foreign Direct Investment

Abstract

This paper examines the effect of three types of capital control policies on FDI: (i) the existence of multiple exchange rates; (ii) restrictions on capital account, and (iii) restrictions on the repatriation of export proceeds. We find that the impact of capital controls on FDI varies by region and has changed over time. In the 1970s and 1980s, none of the policies had a significant impact on FDI. In the 1990s, all three were significant. Furthermore, capital controls has no effect on FDI to Sub-Saharan Africa and the Middle East, but affects FDI to East Asia and Latin America adversely.