TY  - JOUR
AU  - Ju,Jiandong
AU  - Wei,Shang-Jin
TI  - Domestic Institutions and the Bypass Effect of Financial Globalization
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13148
PY  - 2007
Y2  - June 2007
UR  - http://www.nber.org/papers/w13148
L1  - http://www.nber.org/papers/w13148.pdf
N1  - Author contact info:
Jiandong Ju
Research Department
International Monetary Fund
3300 New York Ave NE
Washington, DC 20002
and University of Oklahoma
E-Mail: jju@imf.org

Shang-Jin Wei
Graduate School of Business
Columbia University
Uris Hall, Room 619
3022 Broadway
New York, NY 10027-6902
Tel: 212/854-9139
E-Mail: shangjin.wei@columbia.edu
AB  - This paper proposes a simple model to study the relationship between domestic institutions - financial system, corporate governance, and property rights protection - and patterns of international capital flows. It studies conditions under which financial globalization can be a substitute for reforms of domestic financial system. Inefficient financial system and poor corporate governance in a country may be completely bypassed by two-way capital flows in which domestic savings leave the country in the form of financial capital outflows but domestic investment takes place via inward foreign direct investment. While financial globalization always improves the welfare of a developed country with a good financial system, its effect is ambiguous for a developing country with an inefficient financial sector/poor corporate governance. However, the net effect for a developing country is more likely to be positive, the stronger its property rights protection. This is consistent with the observation that developed countries are often more enthusiastic about capital account liberalization around the world than many developing countries. A noteworthy feature of this theory is that financial and property rights institutions can have different effects on capital flows.
ER  -