Global competitiveness and capital flows: does stage of economic development and risk rating matter?*

What is it about?

This paper closes a gap in the relevant literature by investigating the role of a country’s competitiveness on international capital mobility using robust panel multiple regressions with fixed and random effects. In this study, we use the Global Competitiveness Index to measure a country’s competitiveness level. The research empirically investigates the effect of competitiveness on cross-border capital flows, and shows how stages of economic development and country-specific risk ratings influence inflows and outflows of capital under the effect of competitiveness. Overall, we found that competitiveness has a positive and statistically significant impact on aggregated and disaggregated capital flows. However, the magnitude of its impact varies over different stages of development and across country risk levels.

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Why is it important?

As its main innovation, this study examines empirically the dynamic behavior of capital flows under the impact of global competitiveness for different stages of economic development that have not been explored in depth in the capital flows literature. As a first study, we also attempt to show how country-specific risk levels influence inflows and outflows of capital under the effect of competitiveness.