Immigration and International Financial Flows

Abstract

Capital and labor are the primary components of country growth models. Little, however, is known about the empirical transitional dynamics and interdependency between capital flows and immigration flows. Are they substitutes or complements? Do they move contemporaneously across borders, or is there a lead-lag relationship? This paper attempts to empirically answer these questions. We find, surprisingly, that labor not only moves in the same direction as capital, but it also leads capital. This relation is stronger for foreign direct investment flows than for international portfolio flows. Results are consistent for various countries, periods and migration flow specifications. Thus the paper suggests that an important predictive variable for international capital flows is immigration flows. The primary contribution of this research is therefore to introduce immigration in the subject of international finance.

Keywords: capital flows, labor/migration flows, causality

JEL Classification: F2, F3