Abstract
Capital flight has characterized Russia's integration into international capital markets. Inflows of foreign direct investment have been minor and preceded by temporary inflows of portfolio capital. The paper shows that uncertainty about macroeconomic stabilization exerts a strong negative effect on the volume of capital inflows when investment decisions are irreversible. Reducing uncertainty may, but need not necessarily, lead to more investment if institutional reforms fail to lower the degree of irreversibility. Since monetary stabilization policies have not been accompanied by comprehensive institutional reforms, private capital flows in Russia have remained low and foreign direct investment has been particularly harmed.J. Comp. Econom., June 1999, 27(2), pp. 209–230. The Kiel Institute of World Economics, 24105 Kiel, Germany.
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