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Familiarity Breeds Investment: Migrant Networks and Cross-Border Capital
Unformatted Document Text:  16 financial capital--even lagged--is likely correlated with the stock of portfolio investment in the destination. Second, as we are interested in the influence of migrant networks, controlling for the stock of human capital in country i should decrease the effect of these networks if it is only the highly educated who emigrate. We include a variable measuring the correlation in growth rates between the source and destination country as a means of accounting for risk diversification: ICAPM models hold that source countries should invest in destinations with dissimilar business cycles to diversify their portfolios. To minimize the risk of reverse causality—running from investment to correlated growth rates—we calculate the correlation in growth rates using a 5 year moving average. Countries are, all things equal, more likely to invest where risks of exchange rate depreciation are smaller and where there are minimal transactions costs associated with converting foreign to domestic currency. We therefore include a variable that is coded 1 if the source and destination countries either share the same currency (e.g., dollarization) or they both peg to the same currency. Along these lines we also control for the existence of a dual tax treaty—a bilateral agreement that prevents double taxation. Following our discussion of the existing literature we use two different variables to measure domestic institutional constraints, one that taps political stability and one that captures institutional transparency. The first is a measure of institutional democracy, which, all things being equal, should proxy for the stability of the political environment in the destination country. We use the Polity measure of democracy which is a 21 point scale running from -10 to +10 with higher values indicating more democratic institutions. We also measure the quality of domestic institutions using measures from the World Bank’s project on governance. For our measure of governance we sum the indicators corresponding to voice and accountability, political stability, regulatory quality, rule of law and control of corruption.

Authors: Leblang, David.
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financial capital--even lagged--is likely correlated with the stock of portfolio investment in the
destination. Second, as we are interested in the influence of migrant networks, controlling for
the stock of human capital in country i should decrease the effect of these networks if it is only
the highly educated who emigrate.
We include a variable measuring the correlation in growth rates between the source and
destination country as a means of accounting for risk diversification: ICAPM models hold that
source countries should invest in destinations with dissimilar business cycles to diversify their
portfolios. To minimize the risk of reverse causality—running from investment to correlated
growth rates—we calculate the correlation in growth rates using a 5 year moving average.
Countries are, all things equal, more likely to invest where risks of exchange rate
depreciation are smaller and where there are minimal transactions costs associated with
converting foreign to domestic currency. We therefore include a variable that is coded 1 if the
source and destination countries either share the same currency (e.g., dollarization) or they
both peg to the same currency. Along these lines we also control for the existence of a dual tax
treaty—a bilateral agreement that prevents double taxation.
Following our discussion of the existing literature we use two different variables to
measure domestic institutional constraints, one that taps political stability and one that
captures institutional transparency. The first is a measure of institutional democracy, which,
all things being equal, should proxy for the stability of the political environment in the
destination country. We use the Polity measure of democracy which is a 21 point scale running
from -10 to +10 with higher values indicating more democratic institutions. We also measure
the quality of domestic institutions using measures from the World Bank’s project on
governance. For our measure of governance we sum the indicators corresponding to voice and
accountability, political stability, regulatory quality, rule of law and control of corruption.


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