This article considers the composition of capital flows to developing countries. After developing a taxonomy of the alternative possible forms, it presents a brief summary of the main facts and stylised facts of relevance to the topic. It argues that accessing FDI, portfolio equity, or long-term loans, as opposed to short-term loans (e.g. from banks), is well worth the additional cost, because of advantages in terms of risk-sharing, access to intellectual property, impact on investment, and lesser vulnerability to capital flow reversal. It proceeds to discuss the extent to which authorities control appropriate policy levers and concludes with a brief look at the composition of capital outflows from developing countries.
Document Type: Research Article
Senior Fellow, Institute for International Economics, Washington DC