Why This Matters
Scholars of capital mobility often split into two camps: economists who study what drives cross-border capital and political scientists who examine its political consequences. John S. Ahlquist bridges that divide by asking how actual economic policy outcomes and political institutions shape capital inflows into developing countries—and whether portfolio and direct investors respond differently.
What the Study Asks
Do portfolio investors and foreign direct investors (FDI) react to the same signals from governments? The paper tests whether investors shift funds in response to macroeconomic and fiscal policy outcomes, and whether institutional features such as stability and democracy matter differently for portfolio flows versus FDI.
How the Research Was Done
Ahlquist uses cross-national empirical tests of developing-country capital inflows, explicitly comparing portfolio capital and direct investment. The analysis evaluates investor responsiveness to observable policy outcomes and to variation in political institutions, using statistical models to trace distinct behavioral patterns across investor types.
Key Findings
Policy Takeaway
The results imply a practical trade-off for developing-country governments pursuing market liberalization. Short-run policy signals and fiscal credibility matter for attracting portfolio capital, while longer-term institutional stability and democratic governance are more important for securing FDI. These distinct investor preferences suggest that the sequencing and combination of reforms can shape the type—and durability—of capital inflows a country receives.
| Economic Policy, Institutions, and Capital Flows: Portfolio and Direct Investment Flows in Developing Countries was authored by John S. Ahlquist. It was published by Oxford in ISQ in 2006. |
