Determinants of international capital flows: The saving-retention phenomenon and factors prompting foreign direct investment

This dissertation is organized in a book format. It discusses international capital flows, with an emphasis upon foreign direct investment (FDI). Foreign investment contributes to international production efficiency and to economic growth in developing economies.; The first chapter defines FDI, with special attention to the IMF-OECD definition and problems arising in reporting FDI. Twentieth century global FDI trends are presented. Contrary to common belief, real FDI flows have not always grown during the 20th century.; The second chapter examines the Feldstein-Horioka Paradox of savings-retention. Its criticisms are included, and the model is updated with recent data. Despite predictions of convergence in growth rates and the flow of savings from “rich” to “poor” countries, savings-retention increased in the 1990s.; The third chapter reviews the literature related to determinants of foreign direct investment. Special attention is paid to issues that attracted interest in the 1990s, such as capital controls and transition economies. A table of authors and their findings is included.; The fourth chapter takes a novel approach of analyzing contributions made to FDI inflows by variables related to returns to investment, risk in foreign investment, and countries' institutional fixed effects. Real data, dummy variables, and indices are combined to create a comprehensive view of FDI across countries, while controlling for differences in institutions and degrees of economic freedom.; Some of the major findings are expected; others are surprising. Political stability and corruption impact FDI-to-GDP ratios. Human capital and labor payments-to-total expenditures are significant. In general, investors do not appear to be attracted to low wages. Productivity of capital and policies restricting markets are seldom relevant, except when directly related to FDI inflows. Sign switching and statistical significance of black market activity make it appear that while this may represent weakness in legal and market institutions, it may also indicate entrepreneurship. Openness is highly significant but loses significance in models with several institutional variables. Foreign direct investment is attracted to large markets. Categorization of countries by standard deviation in per-capita GDP has greater significance than actual per-capita income, implying that investors perceive countries within “classes” when choosing subsidiary locations.