8 Conclusion
Introduction Capital flows connect countries and change what has happened in a closed economy. The capital flows have tied the financial markets and the production sectors across countries together, and they become more interdependent. Through capital flows, both their volumes and their compositions, one can analyse the development of one country’s markets and exposure to the contagion effects of other countries as well as one country’s sensitivity to the changes of global financial conditions. The interdependence and closedness of the markets and sectors across countries have increased challenges for empirical studies. Moreover, various definitions and measurements of datasets across countries and across time have made it more difficult to analyse the data prior to applying methodologies, and some methodologies tend to lead to specific results due to their characteristics. Therefore, most empirical studies on capital flows tend to have mixed results. The results which are achieved without thorough examination of datasets, methodologies, the economic conditions of the countries and global financial conditions can easily mislead related policy implications and generate more puzzles and endless debates. These are debates which are difficult to find common ground or agreement to move the debates forward and continue to be endless if we keep taking datasets and specific methodologies as granted without further examination of their suitability in analyzing capital flows and if we keep neglecting the practical lessons from theoretical analysis. Empirical and theoretical work cannot be separated from each other. We require empirical work to show more realities for the theoretical framework so we know what to simplify and to focus on in the analysis. We require theoretical analysis of the empirical works to know what factors have been overlooked and to understand better the causality and the changes of variables as well as the possible impacts of shocks and policies. Through theoretical analysis, we are more likely to identify the possible causes of the inconsistency in the empirical findings and to build up the bridge between arguments. It is the goal of this book to construct a theoretical framework to analyse capital flows and their linkages to economic growth and banking systems. There are various types of capital flows. The two main types of flows are foreign direct investment (FDI) flows and foreign portfolio investment (FPI) flows, which are
