Growing Up with Capital Flows

The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy.Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. WP/02!75In a sample of 60 developing countries, we find evidence of a strong-almost one-toone-relationship between capital inflows and domestic investment.However, this relationship has evolved over time.While growing financial integration with the rest of the world has increased access to foreign private capital, the relationship between foreign capital and domestic investment has weakened, reflecting changes in the composition of inflows, offsetting outflows, and increased foreign-currency reserve requirements.In contrast, better policies have not only brought in more capital but also, especially for foreign direct investment, have tended to strengthen the relationship between foreign capital and domestic investment.