JSPES, Vol. 26, No. 2 (Summer 2001 )
pp. 461-485

Attracting Capital Portfolio Inflows: National Political and Economic Attributes of Emerging Markets

Shah M. Tarzi

The general objective of this study is to discern and examine the role of macroeconomic government policies as well as the economic and financial attributes of host emerging market countries in shaping the destination of portfolio investments. The study identifies key "location advantages" that must exist in order to "pull" portfolio investment. Further, it highlights public policy recommendations for attracting portfolio capital as a source of capital for developing countries. This study finds a direct positive correlation between portfolio capital inflows and improvement in macroeconomic performance in the host economies. Countries in the emerging markets that were able to generate fast economic growth, engage in extensive privatization program, and adopted a public policy posture based on opening their economies to international trade and capital inflows, were more likely to attract foreign portfolio equity investments than those developing countries that did not undertake significant market-friendly macroeconomic stabilization and fiscal consolidation programs.