This paper examines the "Lucas Paradox," which states that capital should flow from rich to poor countries, but in practice, it does not. The authors investigate the role of different theoretical explanations for this paradox, including differences in fundamentals (such as technological differences and institutional structure) and international capital market imperfections. Using data from 1970 to 2000, they find that low institutional quality is the leading explanation for the Lucas Paradox. Specifically, improving institutional quality in poor countries can significantly increase foreign investment. The paper also discusses the role of human capital and government policies in shaping capital flows and concludes that institutional quality is a key factor in attracting foreign investment.This paper examines the "Lucas Paradox," which states that capital should flow from rich to poor countries, but in practice, it does not. The authors investigate the role of different theoretical explanations for this paradox, including differences in fundamentals (such as technological differences and institutional structure) and international capital market imperfections. Using data from 1970 to 2000, they find that low institutional quality is the leading explanation for the Lucas Paradox. Specifically, improving institutional quality in poor countries can significantly increase foreign investment. The paper also discusses the role of human capital and government policies in shaping capital flows and concludes that institutional quality is a key factor in attracting foreign investment.