Not all capital waves are alike: a sector-level examination of surges in FDI inflows

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 14 June 2013

Working Paper No. 474
By Dennis Reinhardt and Salvatore Dell’Erba

We examine episodes of large gross foreign direct investment (FDI) inflows - surges - at the sectoral level in emerging market economies. We find that surges in the financial sector, unlike surges in the non-financial sectors, are associated with boom-bust cycles in GDP and expansions of credit in foreign currency. In terms of the determinants of surges, we find that global and contagion factors have a stronger effect in the financial than the non-financial sectors. We also document a role for policies related to capital account openness: restrictions on other forms of capital inflows tend to increase the likelihood of surges in financial sector FDI.

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