This paper investigates the empirical role of different explanations for the lack of capital flows from rich to poor countries, known as the "Lucas Paradox." The authors examine the impact of institutional quality on foreign investment, finding that improving institutional quality can significantly increase foreign investment. They show that during 1970–2000, low institutional quality was the leading explanation for the paradox. Using data from the International Financial Statistics (IFS) and other sources, they find that improving institutional quality to the level of the UK from Turkey's level would increase foreign investment by 60%. Similarly, improving Peru's institutional quality to Australia's level would quadruple foreign investment. The authors argue that foreign investment can be a channel through which institutions affect long-run development. They also discuss the role of international capital market imperfections, such as asymmetric information and sovereign risk, but find that institutional quality is the most significant factor. The paper concludes that institutional quality is the main explanation for the Lucas Paradox, with empirical evidence showing that improvements in institutional quality lead to increased foreign investment.This paper investigates the empirical role of different explanations for the lack of capital flows from rich to poor countries, known as the "Lucas Paradox." The authors examine the impact of institutional quality on foreign investment, finding that improving institutional quality can significantly increase foreign investment. They show that during 1970–2000, low institutional quality was the leading explanation for the paradox. Using data from the International Financial Statistics (IFS) and other sources, they find that improving institutional quality to the level of the UK from Turkey's level would increase foreign investment by 60%. Similarly, improving Peru's institutional quality to Australia's level would quadruple foreign investment. The authors argue that foreign investment can be a channel through which institutions affect long-run development. They also discuss the role of international capital market imperfections, such as asymmetric information and sovereign risk, but find that institutional quality is the most significant factor. The paper concludes that institutional quality is the main explanation for the Lucas Paradox, with empirical evidence showing that improvements in institutional quality lead to increased foreign investment.