FDI, debt and capital controls

We examine the link between financial sector FDI flows, banking debt flows and capital controls in emerging market economies during episodes of large gross capital inflows - surges. We find that FDI surges in the financial sector behave remarkably similar to surges in banking debt flows: they are associated with boom-bust cycles in GDP and expansions of credit in foreign currency, unlike surges in FDI in the non-financial sectors. Moreover, global and contagion factors have a strong explanatory power in explaining surges in financial FDI and banking debt flows, compared to surges in non-financial sectors. But capital controls have the opposite effect on the two types of flows: restrictions on short-term debt flows tend to decrease the likelihood of surges in banking debt flows but increase the likelihood of surges in financial sector FDI. (C) 2015 Elsevier Ltd. All rights reserved.