Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/301950 
Year of Publication: 
2024
Series/Report no.: 
ADBI Working Paper No. 1445
Publisher: 
Asian Development Bank Institute (ADBI), Tokyo
Abstract: 
Using a panel regression approach across 13 developing Asian economies from 1996Q1 to 2019Q4, this paper examines the extent of financial development as a transmission channel for mediating the "allocation puzzle" in capital flows. This puzzle pertains to why capital seems to flow to economies with lower rather than higher productivity growth. We find that while portfolio equity and debt investment flows are negatively related to total factor productivity (TFP) in developing Asia, thereby contradicting the predictions of traditional neoclassical growth models, financial development significantly mitigates this effect. This is particularly the case at earlier stages of financial development and convergence towards a frontier. For foreign direct investment, although we find that there is no direct allocation puzzle in developing Asia, financial development can hamper the stimulatory effect of TFP for highly financially developed economies given diminishing marginal returns.
Subjects: 
international capital flows
total factor productivity
financial development
developing Asia
JEL: 
F20
F30
F41
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper

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