Economic literature has long shown that capital flows and their volatilities are important for the development, growth and economic stability of economies. Developing countries have been increasingly integrated into the world market exposing their capital inflows to global shocks in addition to domestic shocks driven by country specific characteristics. This paper aims to quantify the effects of the global and domestic factors on capital inflows using FDI as a proxy. Using panel data for 84 countries spanning 1970-2009, the model was estimated using fixed effects. There are four major findings from this study. First, the importance of global and country specific effects depends on the country ‘s stage of development. In particular, financial depth is the only important contributor to FDI in emerging countries. Second, the 2008 Financial crisis positively affected the inflows to developing countries showing a redistribution of assets by investors. Third, the insignificance of exchange rate risk for FDI may indicate the ability of investors to hedge against exchange rate risk.
Bachelor of Arts
Includes bibliographical references.