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Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins
Author(s) -
ARAUJO JULIANA D.,
LASTAUSKAS POVILAS,
PAPAGEORGIOU CHRIS
Publication year - 2017
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12423
Subject(s) - economics , capital (architecture) , developing country , fixed investment , investment (military) , productivity , capital flows , capital intensity , foreign direct investment , fixed capital , econometrics , capital formation , macroeconomics , microeconomics , financial capital , economic growth , geography , profit (economics) , archaeology , politics , political science , law
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.