Template-Type: ReDIF-Paper 1.0
Author-Name: Deniz Igan
Author-X-Name-First: Deniz 
Author-X-Name-Last: Igan
Author-Name: Alexandre R. Lauwers
Author-X-Name-First: Alexandre R. 
Author-X-Name-Last: Lauwers
Author-Name: Damien Puy
Author-X-Name-First: Damien 
Author-X-Name-Last: Puy
Title: Capital flows and institutions
Abstract: Does foreign capital improve the quality of domestic institutions? Consistent with an institutional quality channel of capital flows, we show that industries that are more dependent on "good" institutions to operate grow more than others after foreign capital flows into the private sector. The effects are stronger in countries that are further away from the institutional frontier (e.g., emerging markets), but they disappear and even turn negative in countries with very low initial institutional quality, suggesting that foreign capital inflows can exacerbate the ex-ante institutional deficit. We also find that institution-dependent industries grow less when capital flows to the official sector. Our findings support the view that foreign investors can be, under certain conditions, a catalyst for institutional reform and that the relaxation of government budget constraints generally weakens structural reform incentives.
Length: 64 pages
Creation-Date: 2022-01
File-URL: https://www.bis.org/publ/work994.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work994.htm
File-Format: text/html
Number: 994
Keywords: capital flows, institutions, manufacturing, institutional dependence.
Classification-JEL: F33, F60, G15, E02, O43.
Handle: RePEc:bis:biswps:994