Determinants of International Capital Flowsin Emerging Countries with Emphasison Financial Globalization

This article examines the determinants of international capital flows with an emphasis on financial globalization in emerging countries during 1985-2013. In addition, by entering the interactive variable of institutions' quality with financial globalization, the simultaneous effect of institutions' quality and financial globalization on international capital flows has been evaluated. For this purpose, two-stage generalized moment estimator has been used. The results show that financial globalization increases capital flows in countries that have high-quality institutions and political stability. But in countries with poor quality institutions and political instability, it does not increase capital flows or even decreases them. Also, based on the results, there is a threshold level for the quality of institutions, before reaching it, financial globalization causes a decrease in capital flows, and when the quality of institutions reaches this threshold level, financial globalization causes an increase in capital flows. In addition, among the selected emerging countries, only Hungary, Czech Republic, Slovakia, Chile, Malaysia, Poland, Bulgaria, Lithuania, Mexico, Oman, Estonia and Latvia have been able to reach this threshold level. Considering that the quality of institutions in most emerging countries is below the threshold, these countries should improve the quality of institutions and establish political stability in their country before financial globalization.