capital strongaccountstrong liberalization.pdf

Capital Account Liberalization and Foreign Direct Investment by Ilan Noy,* Department of Economics, University of Hawaii at Manoa and Tam B. Vu, College of Business Economics, University of Hawaii at Hilo Working Paper No. 07-8 March 2007 Abstract We examine the impact of capital account policies on FDI inflows. Using an annual panel dataset of 83 developing and developed countries for 1984-2000, we find that capital account openness is positively but only very moderately associated with the amount of FDI inflows after controlling for other macroeconomic and institutional measures. To a large extent, other country characteristics seem to determine FDI inflows instead of capital account policies. Furthermore, we find that capital controls are easily circumvented in corrupt and politically unstable regimes. We conclude that liberalizing the capital account is not sufficient to generate increases in inflows unless it is accompanied by a lower level of corruption or a decrease in political risk. Key Words: Foreign direct investment, capital controls, capital flows, capital account liberalization. JEL Codes: F21, F36 * Corresponding author: Noy, 2424 Maile Way (Saunders 542), Honolulu, HI 96822. noy@hawaii.edu, (808) 956-7749, (808) 956-4347 (fax). 1. Introduction During the past thirty years, foreign direct investment (FDI) has grown in importance with a large number of developing countries able to attract inward FDI in increasing volumes. The theoretical literature that examines FDI identifies a number of