Capital Inflows Research Articles

Does diversified environmental regulation effect the foreign direct investment inflows and technological innovation? A three‐stage least square approach

AbstractForeign direct investment (FDI) inflows have been significantly impacted by environmental regulation (ER). This study is aiming at analyzing the ER effect on the FDI inflows. By using the data of 2008–2018, we use Three‐stages least square (3SLS) method to assess the connection between FDI inflows and ER. The study results reveal that in Chinese industries, technological innovation (TI) is stipulated by the ER, and as a result, FDI has been engrossed. The results further reveal that TI has been enhanced by capital penetration, and a positive effect is perceived between TI and FDI. The findings of our study also show that there is a significant association between foreign capital (FC) inflows and TI, which indicates that technological policies are effective and advanced environmental policies would intensify the relevant policies between firms. Based on the study outcomes, this research proposes some policy suggestions for constructing a attuned policy system of environmental protection and FDI by regulating the implementation of conforming strategies.

Revisiting capital flow drivers: Regional dynamics, constraints, and geopolitical influences

Our study revisits the drivers of capital flow movement by considering push, pull, and contagion factors for two distinct economic areas: BRICS and a group of European countries. This research was prompted by intensified regional integration and geopolitical challenges, which led to a concentration of regional investments. Major geopolitical events, such as Russian sanctions and the US–China conflict, have spurred capital shifts from affected areas. Based on our regional perspective analysis, we introduce capital flow constraints as an additional driver of capital movement. Our panel data analysis reveals two key insights: Firstly, unlike Europe, which mainly generates outflows, BRICS nations primarily attract capital inflows driven by internal and global influences. Secondly, BRICS exhibits higher sensitivity to capital inflow constraints, whereas Europe is more responsive to outflow constraints. Overall, our research highlights the distinct capital flow trends in BRICS and Europe, driven by their unique economic and geopolitical contexts.

Do Capital Inflows Spur Technology Diffusion? Evidence from a New Technology Adoption Index

Do Capital Inflows Spur Technology Diffusion? Evidence from a New Technology Adoption Index

Finansal Koşullar Endeksi ile Ekonomik Büyüme ve Net Sermaye Girişi Arasındaki İlişkinin İncelenmesi: Türkiye İçin Nedensellik Analizi

The global economic crisis, which had a devastating effect worldwide with the bankruptcy of Lehman Brother's investment bank in the United States of America in 2008, revealed that countries should indicate risks and take precautions accordingly. In this sense, the importance of the Financial Conditions Index (FCI), which was created by considering the monetary policy instruments of the country's central banks and various macroeconomic and financial variables as a whole, has also increased. FCI, the index that has taken place in the literature since the 1990s, with the growth of countries, has been investigated in empirical studies conducted after the global economic crisis. In this study, the related index is calculated using Principal Component Analysis (PCA), and the data generated is analyzed with growth and net capital inflow items. According to the results of the related analysis, while there is bidirectional causality between FCI and real gross domestic product (GDP) growth, one-way causality was found between FCI and net capital inflow. The index created accordingly is the Granger cause of the net capital inflow.

Corporate social responsibility and bank value: evidence from bank capital

PurposeThis study aims to examine the effect of corporate social responsibility (CSR) on banks’ capital, value and risk by investigating its impact on capital inflows and asset quality. The authors aim to investigate the value-protective characteristics of socially responsible performance.Design/methodology/approachThis study uses a two-stage least squares approach with instrumental variables, with bank and year fixed effects to address concerns regarding endogeneity, specifically reverse causality and unobservable factors.FindingsThe results confirm a positive association of CSR with capital adequacy, including higher quality Tier 1 Capital. The authors find strong evidence that banks with higher CSR scores are associated with greater bank value and lower risk. The extended analyses find that the improvement in capital is from annual growth in capital and lower risky assets.Originality/valueThe research advances the field by providing new empirical evidence of a positive association between CSR and capital, including high-quality Tier 1 Capital. This study complements the prior research by simultaneously examining the dynamic links between CSR and capital, bank risk and bank value. The findings are consistent with the view that there is a dynamic link in which CSR affects the operations of banks.

Targeted Liberalization: China's foreign investment regulation reform and its post‐WTO‐accession export surge

AbstractTo gain membership in the World Trade Organization (WTO) in 2001, China substantially modified its regulation of foreign direct investment. These reforms coincided with rapid changes in the composition of capital inflows, as the dominant entry mode shifted from joint venture to wholly foreign owned affiliate. Foreign‐invested enterprises contributed a rising share of China's rapidly growing exports. We investigate how much China's foreign ownership liberalization contributed to these observed trends in foreign investment flows and Chinese exports. Accounting for both the set of activities from which it removed foreign equity caps and those into which it newly encouraged investment, we estimate the impact of China's reforms on firm entry and exports using a difference‐in‐differences estimator. To eliminate bias resulting from heterogeneous and dynamic treatment effects, we also apply novel dynamic difference‐in‐differences estimators. We find that removal of foreign equity caps induced entry of wholly foreign owned firms, while having no significant effect on entry of new joint ventures. Concurrently, the designation of new activities for investment incentives induced foreign entry, particularly in the form of joint ventures. Reduced‐form calculations imply that FDI policy changes explain almost 9% of the increase in exports from foreign‐invested firms over the decade studied. The effect was larger in sectors identified as “high‐tech industries” by the Chinese government, as they contribute most of the estimated policy‐driven export growth from foreign‐invested firms. Thus, China's FDI regulation reform following WTO entry was targeted liberalization: elimination of equity share limits induced new foreign entry, while investment incentives encouraged formation of joint ventures.

A new index to assess economic diplomacy in emerging countries

This paper aims to examine the role of economic diplomacy in attracting foreign capital to emerging countries, by developing a composite index measuring diplomatic activity. We focus on what extent does economic diplomacy influence the inflow of foreign capital to emerging countries. Then, we used data from fifty-five (55) developing economies in 2018. The composite index for diplomatic activity is constructed using principal component analysis. Further, we investigated the effect of this index on foreign capital inflows using linear regression based on the ordinary least squares method. The results indicate that the increase in the number of embassies alone does not significantly influence the evolution of diplomatic action. However, diplomacy plays a non-negligible role in attracting foreign capital. Our results demonstrate a positive and significant link between diplomacy and foreign funding, highlighting the importance of this tool for attracting investment and supporting growth in these countries. The findings of this work are going to serve both scientific and practitioners’ communities as it sheds light on the larger debate around the growing role of economic diplomacy in emerging countries in the context of globalization. Moreover, it provides a useful tool for measuring the effectiveness of foreign policies and their impact on economic expansion.

Nonbank lenders as global shock absorbers: Evidence from US monetary policy spillovers

We show that nonbank lenders act as global shock absorbers from US monetary policy spillovers. For identification, we exploit monetary policy surprises and the global syndicated lending market, where detailed loan-level data allow us to compare the participation of banks and nonbanks in the same loan. When US policy tightens, dollar credit to non-US firms falls, but nonbanks increase credit supply (relative to banks), thereby mitigating the total credit reduction. This relative increase is stronger for riskier non-US firms, proxied by emerging market firms, high-yield firms, or firms in countries with stronger capital inflow restrictions. Finally, there are real effects associated with the international nonbank channel of monetary policy, as firms with better access to nonbank credit relatively increase total corporate debt, investment, and employment.

Does environmental, social, and governance practice boost corporate human capital inflow in China? From the perspective of stakeholder response

AbstractFew studies have answered how different stakeholders' responses to environmental, social, and governance (ESG) practice, including creditors, investors, and media, influence the relationship between ESG practice and high‐quality job‐seekers, which is reflected in corporate human capital inflow. Therefore, we analyze the nexus above theoretically from the perspective of stakeholder theory and examine empirically whether corporate ESG practice can promote corporate human capital inflow, drawing on 8924 firm‐year observations of Chinese‐listed companies during 2011–2020. The findings demonstrate that ESG practice stimulates corporate human capital inflow, which is enhanced when economic policy uncertainty, debt costs, equity costs, or the proportion of female directors is high, whereas weakened when the negative media coverage is high. Further research finds that an underlying mechanism, via corporate visibility, ESG practice can prompt corporate human capital inflow and that the elevating role is more significant in non‐state‐owned or non‐manufacturing enterprises than in state‐owned or manufacturing. Overall, our findings provide a new standpoint to comprehend the interaction of different stakeholder's responses to ESG practice, which enables scholars and managers to understand ESG practice and its effects better.

Analisis Determinan Foreign Direct Investment di ASEAN-6

FDI is one of the components that can spur economic growth. Developing countries, especially in the ASEAN region, need more capital inflows in the form of foreign direct investment. The purpose of this study is to find out what factors affect FDI in 6 ASEAN countries (Indonesia, Malaysia, Singapore, Thailand, Brunei Darussalam, and Vietnam) for the period 2010-2021. The analysis method used is quantitative analysis method with panel data method approach. Data calculations were carried out using E-views 10 and Microsoft Excel 2019. The variables used are FDI as the dependent variable, while GDP, inflation, interest rates, and trade openness are independent variables. The results showed that the coefficient of determination is 0.7566. That is, 75.66% of FDI is influenced by GDP, inflation, interest rates, and trade openness variables and the rest is influenced by other variables. The estimation results of the F statistical test show the results that GDP, inflation, interest rates, and trade openness together have a simultaneous effect on FDI in 6 ASEAN countries. The t-test found that GDP and trade openness have a partial effect with a positive value on FDI in 6 ASEAN countries. Inflation and interest rates have no partial effect on FDI in 6 ASEAN countries.

Positioning Nigeria as a First World Economy in the Era of Signing the African Continental Free Trade Area (AFCFTA)

The challenging circumstances of Nigerian businesses within the African continental free trade agreement has not really placed Nigerian economy at the desired global height as expected. The challenges in line with the ex post facto result of our study showed that, Nigerian was prepared to be launched at the global business circle but are still confronted with specific issues due to lack of proper African continental integration. Our report also showed that, Nigerian capital and financial markets are robust to leverage AfCFTA to boost trade and commerce, attract FDI, utilized our abundance natural and human resources and increase exports. It was however, recommended that: A special purpose vehicle should be created to monitor the progress of the AfCFTA strategies in each of the Member countries. Also, Nigerian government should work harmoniously with stakeholders to ensure trade liberalization especially export sector and start up so as to boost local production; trade Concessions should be given to infant industries, and laws should be made to protect SMEs from foreign and giant competitions; ease of doing business policies should be improved to attract foreign direct investment, FPI and capital inflows. Keywords: Globalization, AfCFTA, International trade, Trade balance, Classical & Neoclassical trade theories.

Globalisation and governance: Thresholds for the impacts of the main determinants of capital inflows?

This paper investigates whether the impacts of the main push (global financial conditions, GFC) and pull (growth) factors on capital inflows are invariant to endogenously estimated threshold levels for structural domestic conditions (SDC) represented by governance, trade openness, de facto international financial integration and de jure financial openness in emerging market and developing economies. Our results strongly suggest that, for all the components of capital inflows, the impact of the domestic pull factor is substantially much higher for the episodes of better governance, higher trade, de jure financial openness and de facto international financial integration. The sensitivity of non-FDI and aggregate inflows to GFC tends to be considerably higher for the episodes of better SDC. FDI inflows are found to be basically determined by the domestic pull factor across all these regimes. The impact of GFC on FDI inflows appears not to considerably change across the SDC.

Labor Migration, Capital Accumulation, and the Structure of Rural Labor Markets

Abstract Between 1967 and 1974, a bilateral treaty increased circular labor migration from Malawi to South Africa by 200%, bringing over 53 million USD in earnings into origin communities. A deadly migrant worker plane crash in 1974 ended these flows and led to migrant repatriation. We study how this shock affected local labor markets. In regions receiving more migrant capital after the crash, workers, particularly women, shifted from farming into non-farm work over thirty years. Investments in non-farm physical and human capital contribute to these sectoral changes. This natural experiment shows that temporary capital inflows can permanently reshape rural labor markets.

Economic nationalists, regional investment aid, and the stability of FDI-led growth in East Central Europe

ABSTRACT Although economic nationalist governments in East Central Europe (ECE) have strongly challenged FDI-dependence, FDI-led growth has remained stable across the region. The political economy literature explains this puzzle with enduring business-state elite interactions and the disciplining role of the EU. Instead, we show that the EU’s regional investment aid rules, which provide central governments in relatively backward member states with considerable policy space, serve as the main policy tool for reinforcing FDI-dependence. Using a unique dataset on regional investment aid granted between 2004 and 2022 in the Visegrád countries (V4), we show that each government, regardless of its ideological background, granted the vast majority of this type of aid to foreign firms. In addition, contrary to their political rhetoric, economic nationalist governments in Hungary and Poland outperformed their non-nationalist counterparts in granting aid to foreign firms. This suggests an instrumental use of this transnationally rooted policy opportunity: as their European political isolation grew, economic nationalists increasingly resorted to the promotion of foreign firms because the continued inflow of foreign capital has a legitimising effect both at home and abroad.

Uncovering asymmetrical contagion effects: US monetary policy and emerging markets

The impact of U.S. monetary policy (USMP) on domestic interest rates and goods markets in Emerging Market Economies (EMEs) remains a subject of ongoing debate. We investigate the fluctuations in U.S. interest rates across 17 inflation-targeting EMEs with flexible exchange rates from 2000–2020. Our findings reveal asymmetric contagion effects, with U.S. interest rate decrease having a more significant short-term impact than rate hikes. Long-term U.S. rates minimally influence EMEs’ domestic rates. Resilience is observed in EMEs with robust GDP growth and favorable trade balances, while increased capital inflows and stock market surges heighten contagion risks. Focusing on the short-term contagion effect on goods markets through international trade drivers, we find that global capital flows and US dollar fluctuations, combined with a rise in the FED rate, contribute to the deterioration of EMEs’ trade balance. The study underscores the need for EMEs to monitor and respond to U.S. monetary policy changes for financial stability and advocates for enhanced international dialogue among policymakers.

Impact of Foreign Aid on Economic Growth of Ethiopia

This study examines the impact of foreign aid on growth in Ethiopia based on time series data from 1980 to 2019. This study uses Autoregressive distributed Lag and an Error Correction to determine the long- and short-run impacts of foreign aid on growth. The empirical results show that, in the long run, foreign aid has a negative and insignificant effect on real GDP growth. However, gross domestic savings, exports, and inflation exert positive and insignificant impacts on GDP growth. Furthermore, Human capital and gross consumption expenditure exert a positive and significant impact on GDP growth, and gross capital information has a negative and significant impact on GDP growth. Thus, Ethiopia’s national development policy should focus on the productive utilisation of domestic savings to increase GDP growth rather than depend on external capital inflow, which is uncertain even when donor countries face long recessions. JEL Codes: E1, E2, E3

Does foreign direct investment cause economic growth in India? An econometric analysis

With the lack of finance, many developing nations are struggling for investment in several areas to generate an opportunity for sustainable livelihood, and Foreign Direct Investment (FDI) emerged as an engine of economic growth, especially in developing nations. It helps to strengthen the economy by mainly promoting capital inflow and technical improvement into the recipient economies. However, some literatures found economic growth, responsible for the inflow of FDI. Therefore, this paper attempts to examine the causal relationship between FDI and Economic Growth in India. By running the Granger causality test in VECM settings, this study found, GDP causes inflow of FDI in India.

Private Equity Performance around the World

We construct a novel dataset to explore the returns of private equity in international markets (i.e., other than North America). We investigate fund performance and persistence and compare the findings to the extensive evidence on North American funds. We find that both investment strategy and investment geography characterize the performance and return persistence of private equity. Buyout funds have the highest returns in Europe, while growth equity funds perform better in Asia-Pacific. Venture capital returns are modest across all international geographies. As documented in the literature for North America, large capital inflows result in lower returns in Europe, while this does not affect other investment geographies. We also find evidence of important market segmentation and strong return persistence for buyout and growth funds in Europe, as well as for a sample of globally diversified, US-sponsored buyout funds. We do not find evidence of persistence in Asia-Pacific or other world locations. Our results are robust to different performance measures and various tests for selection effects. They also hold important implications for both fund managers and investors targeting international markets.

Short-term Capital Inflows and Banking Systemic Risk

Based on stock data of listed banking companies, this article uses the Copula-CoVaR method to estimate banking systemic risk. Study has found that local and non-state-owned large banks are susceptible by negative impacts and greater the financial market risk spillovers. Research has calculated the scale of short-term cross-border capital inflows per quarter from 2010 to 2020 and found that short-term cross-border capital inflows have a positive impact on the improvement of banking systemic risk, and it will amplify its impact through real estate market fluctuations. The policy implication of the article is to pay attention to the use of macro prudential policy tools, guide cross-border capital inflows, avoid the aggregation of high-risk assets such as the real estate market, prevent risk accumulation, and prevent and resolve major systemic financial risks.

New Features and Risks of China's Cross-Border Capital Flows and Policy Recommendations

With mainland China as its primary focus, this article analyzes the patterns of cross-border capital movements. Examining the characteristics and potential hazards of these flows, the study conducts an in-depth analysis of cross-border capital and provides an exhaustive review of pertinent literature. China's international direct investment outflows increased significantly, while capital inflows decreased, and the scope of foreign direct investments expanded, according to the findings. In addition, the research illuminates forthcoming obstacles, specifically the consequences of the COVID-19 pandemic on the equilibrium of the global economy and the volatility of exchange rates. In order to strengthen China's economic stability, the article concludes with policy recommendations that emphasize the significance of flexible policy mechanisms and the strategic allocation of foreign exchange reserves.