The Determinants of Capital Inflows: Does Opacity of Recipient Country Explain the Flows?

Abstract:     
This paper examines the relationship between international capital flows and the opacity of recipient countries. We use Price Waterhouse Coopers (PWC) (2001) opacity index for the year 2000 and investigate its influence on three types of net international capital flows: foreign direct investment, portfolio capital and international bank lending. We find support for higher opacity leading to a reduction in capital inflows, in general. More interestingly, however, in some cases we find counterintuitive results of more capital flows when opacity relating to specific business climate increases - accounting and regulations for foreign direct investment flows, corruption and regulation for portfolio flows, and corruption and economic opacities for international lending flows. This may be because of potentially higher profit opportunities that may be present due to the greater role unofficial channels of investment practices play as these opacity indices rise. Also, we find international bank lending, in general, responded very differently from foreign direct investment and portfolio flows.

Keywords: Opacity, FDI, Portfolio flows, Banking flows

JEL Classifications: G10, G15

Accepted Paper Series