POLÍTICAS DE RECURSOS HUMANOS

We begin by comparing how net capital inflows, and gross inflows and outflows affect investment in EMEs and AEs. First, we aim to have a broad picture about the relative importance of capital flows in determining domestic investment, thus we are not only interested in the coefficient βh, but also on the estimated coefficients

of the other controls. Thus, Table 3.3.2 reports the estimates of Equation (3.1) for h = 0. The first column shows the baseline estimation for EMEs, the second the baseline estimation for AEs, the third the estimation with gross inflows and outflows for EMEs, and the last one the estimates for the components of net capital inflows. The estimated coefficients for capital flows can be interpreted as the response of investment to an increase in capital flows on impact.

We find that in EMEs, a one percentage point increase in net capital inflows in- creases investment significantly by 0.91 percent. An increase in GDP raises invest- ment significantly by 0.49 percent, an increase in the lending interest rate decreases investment significantly by 0.34 percent, as expected, and a one percent improve- ment of the terms of trade increases it significantly by 0.23 percent. We do not find a significant effect of lagged investment, the primary balance or the VIX. Moving to the estimation for AEs (the second column), we find that net capital inflows have a much weaker impact in AEs, but at the same time the lending rate and the primary balance have a much stronger effect, decreasing investment by 2.57 percent and in- creasing it by 0.69 percent respectively. Summing up, we find that capital flows have stronger effects on investment in EMEs than in AEs, and at the same time, domestic

financial conditions, proxied by the lending interest rate, and domestic factors are more important in AEs.7

Table 3.3.2: EMEs vs. AEs

Real investmentIi,t−Ii,t−1

Independent Variable (1) (2) (3) (4)

EMEs baseline AEs baseline EMEs EMEs

infl. & outfl. compon.

Net inflows (% of GDP) 0.91∗∗∗ 0.42∗∗∗

Inflows (% of GDP) 0.67∗∗∗

Outflows (% of GDP) -0.24

Net FDI inflows (% of GDP) 2.11∗∗∗

Net portfolio inflows (% of GDP) 0.44∗

Net credit inflows (% of GDP) 0.87

Lag investment -0.04 -0.11 -0.01 -0.06

GDP growth (per capita) 0.49∗∗ _1.55∗∗ _0.39∗ _0.34

Lending rate -0.34∗ _-2.57∗∗∗ _-0.36∗∗ _-0.37∗∗ Primary balance (% of GDP) 0.14 0.69∗∗∗ _{0.11 0.12} Terms of trade 0.23∗∗∗ 0.06 0.22∗∗∗ 0.2∗∗∗ VIX -0.001 -0.07∗ 0.001 0.0007 Number of observations 587 452 587 587 Number of countries 34 26 34 34 ∗_{p <0.1,}∗∗_{p <0.05,}∗∗∗_{p <0.01.}

R2_{is omitted because it lacks informative contents in the IV estimation.}

Turning our attention to gross inflows and outflows, we find that inflows have a significant positive effect on investment in EMEs (third column in Table 3.3.2), while outflows do not affect investment significantly. This could indicate that foreign capital is more productive than domestic one, as it may also involve inflows of know- how and even human capital. All other estimates remain similar to those from the

7_{Our results are robust to other indicators for domestic financial condition, e.g. the policy interest}

baseline. Finally, column (4) shows the results when we study the components of net capital inflows collectively. We find, as do Mody and Murshid (2005) and Mileva (2008), that FDI and credit affect domestic investment significantly, while portfolio flows do not. The stronger effects of FDI, and to a lesser extent the effects of portfolio flows, can be attributed to the fact that direct investors may have a more detailed knowledge of the host country’s economy and the specific sector in which they are investing. At the same time, direct investors, in contrast to international creditors and even portfolio investors, potentially gain control of the business in which they are investing. This perhaps also involves the implementation of foreign technologies and the transfer of know-how. Again all other coefficient remain quantitatively similar to the estimates of the baseline specification.

As explained above, we are also interested in gross FDI, portfolio and credit flows. Thus, we estimate a version of Equation 3.1, where we include gross in- and outflows of the different subcategories. The results are presented in Table 3.3.3. The first column shows the effects of gross FDI flows. We find that a one percentage point increase in FDI inflows increases domestic investment by 2.34 percent, while an increase in outflows decreases it significantly by 2.32 percent. Moreover, we find that portfolio inflows increase in domestic investment significantly, while outflows do not. Finally, credit inflows also increase domestic investment significantly, and outflows decrease it, but the magnitude of the effect of inflows is higher. Thus, we also see in these last two cases that foreign capital indeed has a stronger effect on investment.

However, the focus of our analysis is the differences between the effects of capital flows in EME and AEs. After understanding that net capital inflows have a larger effect on impact on investment in EMEs, while domestic conditions seem to be more important in AEs, we want to understand the dynamic effects of capital flows. For that purpose, we estimate Equation (3.1) foth= 0, ...,4and compute the cumulative response of investment to a one percentage point increase in net capital inflows in EMEs and AEs separately. Figure 3.3.1 presents the impulse responses constructed using LP-IVs. Net capital inflows increase investment in EMEs on impact, reaching a peak after one year. The response is still significant up to two years after the initial increase in net capital inflows. In AEs, the rise in investment resulting from an increase in net capital inflows is small and is significantly different from zero

only on impact. The differences between these two different groups of countries is significant and striking: capital flows have much stronger and longer lasting effects in EMEs.

Table 3.3.3: Gross inflows and outflows: FDI, credit and portfolio Real investment Ii,t−Ii,t−1

Independent Variable (1) (2) (3)

EMEs FDI EMEs credit EMEs portfolio

FDI inflows (% of GDP) 2.34∗∗∗ FDI outflows (% of GDP) -2.32∗∗∗ Portfolio inflows (% of GDP) 1.72∗∗ Portfolio outflows (% of GDP) 1.34 Credit inflows (% of GDP) 1.37∗∗∗ Credit outflows (% of GDP) -0.65∗∗∗ Lag investment -0.05 -0.03 -0.07

GDP growth (per capita) 0.32 0.54∗∗ 0.31

Lending rate -0.39∗∗ -0.35∗∗ -0.42∗∗∗ Primary balance (% of GDP) 0.08 0.08 0.09 Terms of trade 0.17∗∗∗ 0.24∗∗∗ 0.17∗∗∗ VIX -0.008 0.04 0.008 Number of observations 591 587 587 Number of countries 34 34 34 ∗ _{p <0.1,}∗∗ _{p <0.05,}∗∗∗ _{p <0.01.}

Figure 3.3.1: Real Investment response to a one percentage point increase in net capital inflows

(a) Real Investment - EMEs

−1 0 1 2 Percent 0 1 2 3 4 Years

(b) Real Investment - AEs

−4 −3 −2 −1 0 1 Percent 0 1 2 3 4 Years

Note: The figure shows the estimated cumulative impulse responses of real investment to a one percentage point increase in capital flows. Panel (a) shows the response in EMEs and panel (b)

shows the response in AEs. The dark gray and light gray areas represent the 90% and 95%

confidence bands respectively.