Hostname: page-component-76fb5796d-vfjqv Total loading time: 0 Render date: 2024-04-26T08:21:25.326Z Has data issue: false hasContentIssue false
  • English
  • Français

Domestic Economic Policies, Political Institutions, and Transnational Portfolio Investments

Published online by Cambridge University Press:  20 January 2017

Xun Cao
Xun Cao*
Affiliation:
University of Essex
Get access Rights & Permissions [Opens in a new window]

Abstract

For many, transnational capital is one of the most important driving forces of economic globalization; yet, we know little about what determines cross-border portfolio investments. In addition to recent economic literature's focus on information asymmetries as one key determinant of cross-border investment, this study brings in a political aspect to the field of international trade in assets. The –race to the bottom’ thesis connects domestic economic policies to investment decisions and argues that capital is more likely to move towards economies characterized by economic liberalism; political institutions are also relevant for portfolio investments, because democratic institutions often provide more credible protection against predatory practices. In this study, I model bilateral portfolio investments as a function of economic policies, political institutions, and levels of transparency of sending and receiving countries as well as important international connections. Empirical findings indicate the importance of transparency to attract portfolio investments. Moreover, transnational portfolio investments are only sensitive to some fiscal policy indictors and only within the OECD countries. Therefore, for non-OECD countries, there is still ‘room to move’ in maneuvering different aspects of fiscal policies. Finally, I find that investors care about the nature of political institutions as democratic institutions tend to be associated with higher levels of portfolio investment inflows. This is good news for developing countries that have undergone or are in the process of democratization. In addition to democratizing for peace, increased foreign capital further incentivizes a progression towards democratization.

Keywords

portfolio investmentsfiscal policiesdemocratic institutions
Type
Article
Information
Business and Politics , Volume 11 , Issue 1 , April 2009 , pp. 1 - 36
Copyright
Copyright © V.K. Aggarwal 2009 and published under exclusive license to Cambridge University Press 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abdelal, Rawi. 2006. “Writing the Rules of Global Finance: France, Europe, and Capital Liberalization.” Review of International Political Economy 13 (1): 1–27.Google Scholar
Aboody, David & Lev, Baruch. 2000. “Information Asymmetry, R&D, and Insider Gains.” The Journal of Finance 55 (6): 2747–2766.CrossRefGoogle Scholar
Ahlquist, John S. 2006. “Economic Policy, Institutions, and Capital Flows: Portfolio and Direct Investment Flows in Developing Countries.” International Studies Quarterly 50 (3): 681–704.Google Scholar
Akerlof, George A. 1970. “The Market for ”Lemons”: Quality Uncertainty and the Market Mechanism.” The Quarterly Journal of Economics 84 (3): 488–500.Google Scholar
Andrews, David M. 1994. “Capital Mobility and State Autonomy: Toward a Structural Theory of International Monetary Relations.” International Studies Quarterly 38 (2): 193–218.Google Scholar
Aviat, Antonin & Coeurdacier, Nicolas. 2007. “The Geography of Trade in Goods and Asset Holdings.” Journal of International Economics 71 (1): 22–51.Google Scholar
Basinger, Scott & Hallerberg, Mark. 2004. “Remodeling the Competition for Capital: How Domestic Politics Erase the Race to the Bottom.” American Political Science Review 98 (2): 361–376.Google Scholar
Beck, Thorsten, Clarke, George, Groff, Alberto, Keefer, Philip & Walsh, Patrick. 2007. “New tools in comparative political economy: The Database of Political Institutions.” World Bank Economic Review 15 (1): 165–176.Google Scholar
Berger, Susanne & Dore, Ronald. 1996. National Diversity and Global Capitalism. Ithaca, New York: Cornell University Press.Google Scholar
Burgoon, Brian. 2001. “Globalization and Welfare Compensation: Disentangling the Ties that Bind.” International Organization 55 (3): 509–551.CrossRefGoogle Scholar
Calvo, Guillermo A. & Mendoza, Enrique G. 2000. “The effect of the Internet on international trade.” Journal of International Economics 51 (1): 79–113.Google Scholar
Cameron, David. 1978. “The Expansion of the Public Economy.” American Political Science Review 72 (4): 1243–1261.Google Scholar
Cao, Xun, Prakash, Aseem & Ward, Michael D. 2007. “Protecting Jobs in the Age of Globalization: Examining the Relative Salience of Social Welfare to Industrial Subsidies in OECD Countries.” International Studies Quarterly 51 (2): 301–327.Google Scholar
Cerny, Philip G. 1995. “Globalization and the Changing Logic of Collective Action.” International Organization 49 (4): 595–625.Google Scholar
Cheng, I-Hui & Walk, Howard J 2005. “Controlling for Heterogeneity in Gravity Models of Trade and Integration.” Review - Federal Reserve Bank of St. Louis 87 (1): 49–63.Google Scholar
Chinn, Menzie D, & Ito, Hiro. 2006. “What Matters for Financial Development? Capital Controls, Institutions, and Interactions.” Journal of Development Economics 81 (1): 163–192.CrossRefGoogle Scholar
CIA. 2004. The World Factbook. Central Intelligence Agency, accessed: 03/22/2006: http://www.cia.gov/cia/publications/factbook/fields/2122.html.Google Scholar
Cooper, Ian & Kaplanis, Evi. 1994. “Home Bias in Equity Portfolios, Inflation Hedging, and International Capital Market Equilibrium.” The Review of Financial Studies 7 (1): 45–60.Google Scholar
Daude, Christian & Fratzscher, Marcel. 2007. “The Pecking Order of Cross-border Investment.” Journal of International Economics 74 (1): 94–119.Google Scholar
Egger, Peter. 2002. “An Econometric View on the Estimation of Gravity Models and the Calculation of Trade Potentials.” The World Economy 25 (2): 297–312.Google Scholar
Eichengreen, Barry & Luengnaruemitchai, Pipat. 2006. Bond Markets as Conduits for Capital Flows: How Does Asia Compare? NBER Working Paper Series 12408 National Bureau of Economic Research Cambridge, MA:.Google Scholar
Everitt, Brian S, & Dunn, Graham. 2001. Applied Multivariate Data Analysis. New York, NY: Oxford University Press.Google Scholar
Frankel, Jeffrey A. 1994. The Internationalization of Equity Markets. Chicago, IL: University of Chicago Press.Google Scholar
Frankel, Jeffrey A. & Rose, Andrew K. 1998. “The Endogeneity of the Optimum Currency Area Criteria.” The Economic Journal 108 (449): 1009–1025.Google Scholar
French, Kenneth R. & Poterba, James M. 1991. “Investor Diversification and International Equity Markets.” The American Economic Review 81 (2): 222–226.Google Scholar
Garrett, Geoffrey. 1998. Partisan Politics in the Global Economy. New York: Cambridge University Press.Google Scholar
Garrett, Geoffrey & Mitchell, Deborah. 2001. “Globalization and the Welfare State.” European Journal of Political Research 39 (2): 145–177.Google Scholar
Garrett, Geoffrey & Lange, Peter. 1991. “Political Responses to Interdependence: What's ”Left” for the Left?” International Organization 45 (4): 539–64.Google Scholar
Gelos, Gaston & Wei, Shang-Jin. 2005. “Transparency and International Portfolio Holdings.” Journal of Finance 60 (6): 2987–3020.Google Scholar
Glick, Reuven & Rose, Andrew K. 2001. Does a Currency Union Affect Trade? The Time Series Evidence. NBER Working Paper Series 8396 National Bureau of Economic Research Cambridge, MA.Google Scholar
Hall, Peter A. 1986. Governing the Economy : the Politics of State Intervention in Britain and France. Cambridge, MA: Cambridge: Polity Press.Google Scholar
Hibbs, Douglas A. 1977. “Political Parties and Macroeconomic Polciy.” American Political Science Review 71: 1467–1487.CrossRefGoogle Scholar
Hooper, Vince & Kim, Suk-Joong. 2007. “The Determinants of Capital Inflows: Does Opacity of Recipient Country Explain the Flows?” Economic Systems 31 (1): 35–48.Google Scholar
Imbs, Jean. 1999. Co-Fluctuations. CEPR Discussion Papers 2267 C.E.P.R. Discussion Papers.Google Scholar
Jensen, Nathan M. 2006. Nation-states and the Multinational Corporation: A Political Economy of Foreign Direct Investment. Princeton, NJ: Princeton University Press.Google Scholar
Kang, Jun-Koo & Stulz, René M. 1997. “Why Is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan.” Journal of Financial Economics 46 (1): 3–28.CrossRefGoogle Scholar
Lane, Philip R. & Maria Milesi-Ferreti, Gian. 2004. International Investment Patterns. IMF Working Paper WP/04/134 International Monetary Fund Washington DC:.Google Scholar
Leblang, David. 2007. Diaspora Bonds and Cross-Border Capital. Working paper Department of Political Science, University of Colorado.Google Scholar
Li, Quan & Resnick, Adam. 2003. “Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries.” International Organization 57 (1): 175–211.Google Scholar
Matyas, Laszlo. 1997. “Proper Econometric Specification of the Gravity Model.” The World Economy 20 (3): 363–368.Google Scholar
Mosley, Layna. 2000. “Room to Move: International Financial Markets and National Welfare States.” International Organization 54 (4): 737–773.CrossRefGoogle Scholar
Mosley, Layna. 2003. Global Capital and National Governments. New York, NY: Cambridge University Press.Google Scholar
OECD. 2000. Tax Burdens: Alternative Measures. Paris: Organization for Economic Cooperation and Development.Google Scholar
Olson, Mancur. 1993. “Dictatorship, Democracy, and Development.” American Political Science Review 87 (3): 567–76.Google Scholar
Oneal, John R. 1994. “The Affinity of Foreign Investors For Authoritarian Regimes.” Political Research Quarterly 47 (3): 565–88.CrossRefGoogle Scholar
Plumper, Thomas & Troeger, Vera E. 2007. “Efficient Estimation of Time-Invariant and Rarely Changing Variables in Finite Sample Panel Analyses with Unit Fixed Effects.” Political Analysis 15 (2): 124–139.Google Scholar
Polanyi, Karl. 1944. Great Transformation. New York, Toronto: Farrar & Rinehart, in.Google Scholar
Portes, Richard & Rey, Helene. 2005. “The determinants of cross-border equity flows.” Journal of International Economics 65 (2): 269–296.CrossRefGoogle Scholar
Portes, Richard, Rey, Helene & Oh, Yonghyup. 2001. “Information and capital flows: The determinants of transactions in financial assets.” European Economic Review Volume 45 45 (4-6): 783–796.Google Scholar
Price Waterhouse Coopers. 2001. The Opacity Index: A Project of the Price Waterhouse Coopers Endowment for the Study of Transparency and Sustainability.Google Scholar
Przeworski, Adam & Wallerstein, Michael. 1988. “Structural Dependence of the State on Capital.” The American Political Science Review 82 (1): 11–29.Google Scholar
Quinn, Dennis P, & Inclan, Carla. 1997. “The Origins of Financial Openness: A Study of Current and Capital Account Liberalization.” American Journal of Political Science 41 (3): 771–813.Google Scholar
Rodrik, Dani. 1997. Has Globalization Gone Too Far? Washington, D.C.: Institute for International Economics.CrossRefGoogle Scholar
Rose, Andrew K. 2004. “Do We Really Know That the WTO Increases Trade?” The American Economic Review 94 (1): 98–114.Google Scholar
Rudra, Nita. 2002. “Globalization and the Decline of the Welfare State in Less-Developed Countries.” International Organization 56 (2): 411–445.Google Scholar
Ruggie, John G. 1982. “International Regimes, Transitions, and Changes: Embedded Liberalism in the Postwar Economic Order.” International Organization 36 (2): 379–415.Google Scholar
Simmons, Beth A, & Elkins, Zachary. 2004. “The Globalization of Liberalization: Policy Diffusion in the International Economy.” American Political Science Review 98 (1): 171–189.Google Scholar
Tesar, Linda L. 1999. The Role of Equity in International Capital Flow. In International Capital Flows, ed. Feldstein, Martin. Chicago, IL: University of Chicago Press.Google Scholar
Tesar, Linda L. & Wernen, Ingrid M. 1995. “Home Bias and High Turnover.” Journal of International Money and Finance 14: 467–492.Google Scholar
Ward, Michael D. & Gleditsch, Kristian S. 1998. “Democratizing for Peace.” American Political Science Review 92 (1): 51–61.Google Scholar
Wei, Shang-Jin. 2000. “Local Corruption and Global Capital Flows.” Brookings Papers on Economic Activity 2: 303–354.Google Scholar
Wibbels, Erik & Arce, Moisés. 2003. “Globalization, Taxation, and Burden-Shifting in Latin America.” International Organization 57 (4): 111–136.Google Scholar
Zahariadis, Nikolaos. 1997. “Why State Subsidies? Evidence from European Community Countries, 1981–86.” International Studies Quarterly 41 (2): 341–354.Google Scholar
Zahariadis, Nikolaos. 2001. “Asset Specificity and State Subsidies in Industrial Countries.” International Studies Quarterly 45 (4): 603–616.Google Scholar