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Capital Flows to Least Developed Countries: What Matters?

Hossain, Monzur (2013): Capital Flows to Least Developed Countries: What Matters?

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Abstract

This study analyzes capital flows to least developed countries (LDCs) to understand their determinants and persistence. The study finds that macroeconomic stability, trade openness and financial sector development are the key determinants of capital flows (both official and private) to LDCs. Regional variation and economic size also matter for capital flows. While economic size is positively associated with official capital flows (external loans and grants), it is negatively associated with FDIs. The study does not find any link between capital inflows and institutional quality or political environment in LDCs, as opposed to the findings of some recent studies on emerging and developed countries. The results suggest for appropriate policies aimed at improving macroeconomic and financial environment with further liberalization of trade policies in order to ensure more capital flows to LDCs.

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