That failing leads to inadequate investment, particularly if business activity is further impeded by inadequate property rights and faulty regulations. As a result, excess saving flows to countries with better financial systems (Prasad, Rajan, and Subramanian, 2006; Ju and Wei, 2006).
A closely related point is that, compared with developing economies, industrial countries are believed to produce financial assets that are safer, less volatile, and more liquid, advantages that also draw capital out of developing economies (Caballero, Farhi, and Gourinchas, 2006; Mendoza, Quadrini, and Rios-Rull, 2007).