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FDI and Portfolio Flow Drivers

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International capital flows are of major concern to policymakers due to their fluctuating nature and how that can impact domestic markets and interest rates. This research project attempts to discern what are the main drivers of international capital flows and elaborates on the current literature modeling the cross-sectional variation. It aims to decompose these capital flows into those that are foreign direct investment (FDI) and portfolio investment driven by the same economic factors, and to identify new factors that drive one flow but not the other. Our approach uses international economic theory to describe these flows, distinguishing itself from other literature that uses gravity model variables—such as distance and the financial markets level of development—to do so.

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FDI and Portfolio Flow Drivers

International capital flows are of major concern to policymakers due to their fluctuating nature and how that can impact domestic markets and interest rates. This research project attempts to discern what are the main drivers of international capital flows and elaborates on the current literature modeling the cross-sectional variation. It aims to decompose these capital flows into those that are foreign direct investment (FDI) and portfolio investment driven by the same economic factors, and to identify new factors that drive one flow but not the other. Our approach uses international economic theory to describe these flows, distinguishing itself from other literature that uses gravity model variables—such as distance and the financial markets level of development—to do so.