 |
Foreign Direct Investment and Capital Flight
Chander Kant Princeton Studies in International Finance No. 80
|
| Foreign direct investment (FDI) is now the largest single source of external finance for developing countries, and the share of developing countries in global FDI inflows has now reached an historic high. In addition, capital flight is also having a significant effect on finance and development. Because foreign debt and capital flight appear to accumulate simultaneously, it is natural to ask whether FDI inflows, by increasing the availability of foreign exchange, similarly facilitate capital flight or whether these inflows mark, instead, a reduction of capital flight (or a gradual return of flight capital).Because the robustness of any results can be established only if the same conclusions hold even with quite different measures of capital flight, this study addresses three questions: (1) Do FDI inflows in developing countries facilitate capital flight (as private external borrowings have), or do they, instead, mark a reduction in capital flight or a return of flight capital? (2) Does the relation between capital flight and foreign direct investment depend on the specific measure of capital flight used? (3) Is the dominant cause of capital flight general economic mismanagement, or is it discriminatory treatment against residents' capital? Similarly, is foreign direct investment explained by a generally attractive investment climate, or is it explained by preferential treatment given specifically to such investment? |
