World Market Integration Through the Lens of Foreign Direct Investors
40 Pages Posted: 30 Dec 2014
Date Written: July 3, 2004
This paper is motivated by the unparalleled increase in foreign direct investment to emerging market economies of the last 25 years. Using a large cross-country time-series data set, we evaluate the dependence of foreign direct investment on global factors, or worldwide sources of risk (i.e., factors that drive foreign direct investment across several countries). We construct a globalization measure that equals the share of explained variation in direct investment attributable to global factors. We show that our globalization measure has increased steadily for developing and developed countries. For the full sample of countries, the globalization measure rose by over ten-fold from 1985 to 1999. Furthermore, in recent years developing countries’ exposure to global factors has approached that of developed countries. Finally, our globalization measure correlates strongly with measures of capital market liberalization, supporting our hypothesis that increased market integration leads to a greater role for worldwide sources of risk. We discuss the implications of our results for public policies regarding capital market liberalization and policies directed at attracting foreign investment.
Keywords: Capital market integration, emerging economies, global factors, foreign direct investment
JEL Classification: F21, F23, F36, G15, G18, G28
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