by Muhammad Akhtaruzzaman (Author)
About the Author
Muhammad Akhtaruzzaman is Senior Lecturer at Toi Ohomai Institute of Technology, Rotorua, New Zealand. His research interests focus on international macroeconomics, empirical macroeconomics, development economics, and business and management.
About this book
This book offers a comprehensive analysis of the debates on international capital flows, and presents a new evidence-based answer to the long-standing question of why capital doesn’t tend to flow from rich to poor countries as predicted by standard neoclassical theory – a puzzle known as the Lucas paradox. Further, the book reviews alternative approaches to conventional estimates of the marginal product of capital (MPK) and considers whether these estimates actually help us understand observed international capital flows.
A rigorous quantitative approach is subsequently used to provide clear empirical evidence on the determinants of capital flows across borders. The findings of this empirical analysis suggest that generous economic policies on capital account convertibility are more influential than differences in institutional quality in terms of determining international capital flows. In closing, the relative importance of various types of political risk (e.g. expropriation and corruption) is examined. After determining that expropriation risk has one of the greatest effects on foreign direct investment (FDI), the book proposes an appealingly intuitive statement for the lack of FDI flows to many capital-scarce developing countries.
Brief contents
1 Introduction 1
1.1 Introduction 1
1.2 Trends in Capital Flows: Historical Data 2
References 7
2 Review of the Neoclassical Theory of Capital Flows and Related Empirical Literature 9
2.1 Introduction 9
2.2 Review of the Neoclassical Model 10
2.3 Review of the Empirical Literature 15
References 23
3 The Lucas Paradox: Review of Marginal Product of Capital and Net Versus Gross Capital Flows 25
3.1 Introduction 25
3.2 Revised Estimates of MPK 26
3.3 Do Revised MPK Estimates Help Understand International Capital Flows? 32
3.3.1 Data and Descriptive Statistics 32
3.3.2 Do CF’s (2007) MPK Estimates Solve the Lucas Paradox? Capital Stock Data 33
3.3.3 Do LPP’s (2012) MPK Estimates Solve the Lucas Paradox? Capital Stock Data 38
3.3.4 Do CF’s and LPP’s MPK Estimates Solve the Lucas Paradox? Capital Flow Data 40
3.4 What Do We Learn from this Exercise? 42
3.5 Net Versus Gross Capital Flows 46
References 48
4 Estimating the Determinants of Capital Inflows Using Cross Sectional Data 51
4.1 Introduction 51
4.2 Does Institutional Quality Explain the Lucas Paradox? 52
4.3 Cross Section Analysis Using an Updated Dataset, 1984–2017 60
4.3.1 Data and Descriptive Statistics 61
4.3.2 Cross Section Findings 65
4.3.3 Decomposition of GDP Per Capita 69
4.3.4 Robustness Checks 71
4.4 Instrumental Variable (IV) Estimates 77
4.4.1 Over-Identifying Restrictions and Week Identification 78
4.4.2 IV Results for Endogenous Institutions Index 79
4.4.3 IV Results for Endogenous Institutions Index and Endogenous GDP Per Capita 81
4.5 Summary of Cross Section Analysis 84
References 85
5 Panel and Non-linear Models of Capital Inflows 89
5.1 Introduction 89
5.2 Econometric Issues in Panel Models 91
5.3 Fixed Effects (FE) Model Results 94
5.3.1 Diagnostic Tests 96
5.3.2 Decomposition of GDP Per Capita 97
5.4 Dynamic Model Analysis 99
5.5 Interaction Effect and Nonlinear Effects of the Determinants of Capital Flows 100
5.5.1 Institutional Quality and Capital Account Openness 102
5.5.2 Economic Development and Capital Account Openness 106
5.5.3 Economic Development and Institutional Quality. 112
5.6 Summary of Panel Model Analysis 115
References 116
6 The Effects of Political Risk on Capital Inflows 117
6.1 Introduction 117
6.2 Literature Review 120
6.3 Modelling FDI and Political Risk 129
6.3.1 Net Versus Gross FDI 130
6.3.2 Normalization of the Dependent Variable 132
6.3.3 Indexes Measuring Political Risk and Institutional Quality 134
6.3.4 Additional Control Variables 135
6.4 Model Specification 135
6.5 Results 137
6.5.1 Cross Section Estimates 137
6.5.2 Panel Fixed Effects Estimates 142
6.5.3 GMM Dynamic Panel Estimates 144
6.6 Ranking of Political Risk and Institutional Factors 145
6.7 Effects of Composite Risk Measures 164
6.8 Summary of Expropriation Risk Analysis. 166
References 169
7 The Future of the Lucas Paradox 171
7.1 Introduction 171
7.2 Predictions About Capital Flows, Geopolitics and Possible Impacts 171
7.3 Conclusion 173
References 173
8 Conclusion 175
References 177
Appendix A: Further Explanation to the Footnotes 179
Appendix B: Data Descriptions, Constructions, and Sources (Sample Period is from 1984–2015, if not Mentioned Otherwise) and Summary Statistics of Main Variables of Interest. 183
Appendix C: Histogram Plots and Full Model Estimates. 193
Appendix D: Country List 199
Bibliography 203
Pages: 203 pages
Publisher: Springer; 1st ed. 2019 edition (September 12, 2019)
Language: English
ISBN-10: 9811390681
ISBN-13: 978-9811390685
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