Determinants of foreign capital inflows. The role of push versus pull factors

Abstract

Our robust findings based on the recently developed methodology of sequential (twostage) estimation of linear panel-data model (SELPDM), alongside the two-step system GMM model contributes significantly to the extant literature on the determinants of foreign capital flows in developing countries. Our focused discussion on the push and pull framework and its effects on foreign capital flows using annual data for a panel of 47 developing economies over 2000 to 2019 draws interesting observations. We find the role of market size is more nuance for FDI flows than for any other types of capital flows, furthermore on the side of domestic drivers, host countries trade openness, quality of institutions, capital account openness and the level of financial development matter to all the capital flows. Whereas, on the other hand, global risk aversion, US bond yield, shadow rates, global returns and liquidity were found to be significant drivers of substantial amounts of capital flows to the developing world. Our findings suggest the relative merit of global factors over the domestic once in explaining significant surges in the capital flows to the developing economies. In essence the study suggests key domestic fundamentals and global factors for sound policies to induce surges in foreign capital for developmental goalmouths.