Domestic Institutions and the Bypass Effect of Financial Globalization

Cross-border capital flows have been increasing in real value at a pace of about 6 percent a year since 1980, faster than those of world gross domestic product (GDP) and trade. The progress has been particularly rapid since 1990 (though with a temporary drop during 1997–2002, and another probably temporary dip that started in 2008). This reflects falling barriers to capital flows in many parts of the world. Yet, the composition varies across countries. Many developing countries (e.g., China, Malaysia, and South Africa) are net importers of foreign direct investment (FDI) on the one hand, but net exporters of financial capital on the other. Many developed countries (e.g., France, the United Kingdom, and the United States) do the reverse, exporting FDI but importing financial capital. While there is a wellestablished literature on two-way flows within a subset of capital category such as