International Capital Flows: Sensitivity to the common factor driving capital flows to emerging and developing countries from 2001Q1 to 2017Q1.

After the seminal paper of Lucas (1990), academics emphasized different factors as the reason of capital inflows into developed countries. This paper employs a principal component analysis with a dataset of quarterly gross capital flows (2001Q1-2017Q1) to analyze the behavior of these flows across 50 emerging markets and developing countries. We measure the co-movement in capital flows and explain which push factors determine this common factor. We confirm that there is co-movement in capital inflows to emerging economies and developing countries, especially in the categories direct investment flows and other investment flows we see a high common variance. Furthermore, we confirm that the explanatory power of global push factors in explaining the common dynamics differs across capital flow types. Although we did not find the foreign investor base to be as important as in other papers, we find market characteristics (especially for direct investment flows), economic and institutional fundamentals, and the location of a country (especially for direct investment flows and other investment flows) necessary in explaining the sensitivity to the common factor driving capital flows to emerging and developing countries. Lastly, we find development to be especially important for other investment flows/banking flows. Our findings suggest that emerging economies and developing countries should primarily focus on their market liquidity and institutional quality to gain from global push factors.