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.