Working Paper: CEPR ID: DP17527
Authors: Deniz Igan; Alexandre Lauwers; Damien Puy
Abstract: Consistent with an institutional quality channel of capital flows, we show that industries that are more dependent on ‘‘good’’ institutions grow relatively more after foreign capital flows into the private sector. The effects are stronger in countries further away from the institutional frontier, but they disappear and even turn negative in countries with very low institutional quality. Institution-dependent industries grow, however 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.
Keywords: capital flows; institutions; manufacturing; institutional dependence
JEL Codes: F33; F60; G15; E02; O43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign capital inflows (F21) | industry growth (L16) |
| Institutional dependence (O17) | industry growth after foreign capital inflows (F21) |
| Distance from institutional frontier (F55) | effect of foreign capital inflows on industry growth (F21) |
| Low institutional quality (O17) | diminished or reversed effect of foreign capital inflows (F21) |
| Capital flows to official sector (F32) | industry growth in institution-dependent industries (O43) |
| Foreign investors (F21) | institutional reform (O17) |
| Preconditions unmet (C62) | exacerbated institutional deficits (O17) |
| Thresholds of institutional quality (O17) | benefits of capital inflows (F21) |