Essays on cumulative capital flows

Abstract

newlineThe issue of capital flows is much discussed in the literature. While there is ample literature on the wisdom of capital flows at aggregate level, studies at disaggregate level are scarce. In the Indian context, disaggregate studies are even scarcer. A disaggregate data study is expected to render deeper insights into the mechanism of the economy by capturing the heterogeneity arising out of the behavior of different entities. newlineThis thesis tries to fill this gap by analyzing the two core issues related to capital flows at firm level, namely determinants of foreign capital and the impact of foreign capital for the Indian economy. These two issues form the first two chapters of this thesis. The manufacturing sector firms are considered for the analyses. The sample consists of a panel dataset of 1479 firms with 10181 observations. The time period of the study is 2000-01 to 2012-13. The condition is quintessential of micro panel data, with large number of entities and a small time frame. Hence, this calls for estimation techniques which do not need large time dimensions to render consistent estimates of the parameters. Generalized Method of Moments (GMM), which is widely employed in the literature for similar concerns, is utilized for the analyses. To study the impact of certain time invariant firm-level institutional factors, which otherwise get dropped in a GMM set up, Random Effects (RE) estimations are also done that take the heterogeneity of firms into consideration. These also act as robustness checks for other variables. newline newlineThe analysis of determinants of foreign capital at firm-level is done in two stages. In the first stage, the two constituents of foreign capital, namely equity and debt are considered. In the next stage, foreign equity is disaggregated into promoters and non-promoters equity. Apart from firm-level characteristics, variables capturing international markets volatility are also taken to see their impact on the incoming foreign capital. Volatility in foreign exchange (as standard deviation of cha