The pull and push factors in North-South private capital flows: conceptual issues and empirical estimates

The pull and push factors in North-South private capital flows: conceptual issues and empirical estimates

Published Jan 2003

Author

M. Odedokun

Publisher

Focus themes

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What determines private capital flows to developing countries?

This paper attempts to explain private capital flows to developing countries through a model framework that approaches the issue from the perspective of a capital-exporting developed country and which also takes cognizance of developments in other industrialised countries that could be competing with developing countries for private capital flows. The model is operationalised and estimated with annual panel data over 1970-2000 for 19 capital-exporting developed countries.

Findings include:

  • effects of per capita income levels:
    • while there is strong evidence that source countries’ FDIs rise faster than their per capita income levels, the evidence of this effect on portfolio capital flows (PCF) and its various components is rather weak
    • a capital-exporting developed country’s PCF is diverted from developing countries by rising per capita income levels in other developed countries
  • effects of interest rates:
    • except for export credits, all components of private capital flows tend to be pushed to developing countries as a result of low interest rates in the specific capital-exporting developed country
    • interest rate is a significant pull-factor for flows to developing countries
  • effects of economic growth:
    • there is no evidence that economic growth in the capital-exporting country truly affects net private capital flows
    • there is no evidence that economic growth in destination countries has any pull on net private capital flows
  • effects of phase of economic cycle:
    • the rising phase of economic cycle in a capital-exporting developed economy appears to have ‘pushed’ FDI to developing countries, while there is no evidence that PCF or any of its components are affected by economic cycles
    • the phase of economic cycle collectively prevailing in developing countries did not pull foreign private capital to them as such
  • effects of openness of the economy regarding BOP capital account transactions:
    • the removal of capital controls in a capital-exporting developed country is observed not to have pushed net capital flows to developing countries
    • elimination of capital controls by developing countries is a significant pull-factor for foreign private flows, particularly, PCF
  • effects of unstable macroeconomic environment:
    • resident investors in a capital-exporting country appear not to view domestic macroeconomic imbalance as a major issue that would push them to invest in developing countries
  • effects of existing level of external debt burden:
    • foreign private investments of all categories appear to be consistently deterred from highly indebted developing countries
    • foreign private investors seem to regard severe indebtedness as a high-risk indicator, while private debt seems to have little effect on net private capital flows in general

    [adapted from author]

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