Determinants of Investment by the Norwegian Sovereign Wealth Fund: GDP vs. Institutions

During the current episode of globalization, capital has flown primarily to high income countries. Attempts to explain this “Lucas Paradox” have focused on the quality of institutions. We analyze data from a major institutional investor, the Norwegian Sovereign Wealth Fund, to estimate the separate effects of income per capita and institutional quality on international capital flows. After controlling for institutional quality, GDP per capita remains the primary determinant of investment.