Determinants of capital flows to least developed countries: Lessons for Bangladesh

Abstract

This chapter analyzes determinants and persistency of capital flows (foreign direct investment, debt and official aid) to least developed countries (LDCs) for the period 1990-2012. The results indicate that capital flows to LDCs, particularly foreign direct investment (FDI) and external debt, are associated with various factors, such as macroeconomic stability, financial sector development, trade openness, natural resource abundance and political environment. However, the determinants of capital flows vary significantly across regions. While FDIs are of natural resource seeking type in Africa, it is mostly efficiency-seeking in Asia. The results suggest for appropriate policies aimed at improving macroeconomic and financial environment along with political stability in order to ensure more capital flows.