Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins

48 Pages Posted: 26 Mar 2015

See all articles by Juliana Araujo

Juliana Araujo

International Monetary Fund (IMF)

Povilas Lastauskas

Center for Excellence in Finance and Economic Research; Vilnius University

Chris Papageorgiou

International Monetary Fund (IMF) - Research Department

Date Written: February 7, 2015

Abstract

The capital flows network has changed substantially, bringing new investors and target economies into play. Related, a recent intensification of capital flows to low income countries (LICs) has posed a number of questions. Most importantly, the very nature of those flows and important factors affecting foreign investors decision which can ultimately affect growth prospects of low income countries (together with an issue of sustainability) remain open for an academic probe. Due to an existence of a share of costs which is fixed in nature, there is a need to analyze capital flows and their evolution at two margins: intensive and extensive. This paper presents a parsimonious theoretical account that is consequently mapped into an econometric framework where we allow for two-tier decisions and cross-sectional dependence. Results indicate that market entry costs affect investment decisions pertinent to the LICs, consistently with the static theory. However, persistence in extensive margin eliminates this effect once dynamics is allowed for.

Keywords: Bilateral Capital Flows, FDI, Portfolio Flows, Developing Economies, Extensive and Intensive Margins, Heterogeneous Panels, Cross-Sectional Dependence, Copulae

JEL Classification: C33, C34, F21, F62, O16

Suggested Citation

Araujo, Juliana and Lastauskas, Povilas and Papageorgiou, Chris, Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins (February 7, 2015). Available at SSRN: https://ssrn.com/abstract=2584723 or http://dx.doi.org/10.2139/ssrn.2584723

Juliana Araujo

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Povilas Lastauskas (Contact Author)

Center for Excellence in Finance and Economic Research ( email )

Totoriu g. 4
Vilnius, LT-01121
Lithuania

HOME PAGE: http://www.lb.lt/cefer

Vilnius University ( email )

Lithuania

Chris Papageorgiou

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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