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A sensitivity analysis of foreign direct investment determinants in developing countries during the 1990s.


This research project explains why Foreign Direct Investment (FDI) is the largest source of foreign private capital in developing countries. To provide a comprehensive answer, we divide the project into three separate papers. The first paper consists of analysis of the stylized facts of the evolution of private capital flows to developing countries. We find that capital account liberalization and legal reforms in the early 1990s triggered the growth of foreign capital flows to the developing world. We also find that the dispersion of flows among countries depends on the level of income and institutional quality: poorer and institutionally weaker countries get less foreign investment and usually only receive FDI. Finally, we show that the onset of the financial crises of the 1990s changed the composition of flows toward FDI and made developing countries rely almost exclusively on FDI as a source of foreign capital.