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While extensive literature highlights the positive impact of the refugee presence on receiving communities and states, it is evident that developing countries, more so than developed countries, encounter greater risks from hosting Forcibly Displaced People (FDP), such as increased competition, environmental damage, and security concerns. How, then, would less developed countries, facing such dilemma, effectively address the challenges of forced displacement and develop a coping strategy? We argue that developing states with relatively higher capacity are able to control the level of FDP inflows and to shape more generous asylum and refugee policies. Using a dataset that combines two recently published datasets – the Developing World Refugee and Asylum Policy (DWRAP) dataset (Blair et al. 2021) and State Capacity (SC) dataset (Hanson and Sigman 2021) – and UNHCR’s Refugee Population Statistics Database, we illustrate how state capacity affects FDP influxes and displacement policy formulation, specifically delving into the dimensions of both state capacity and displacement policy. Our findings show that the liberalization of various aspects of asylum policies is influenced significantly by the data-gathering capabilities and fiscal capacity. Concerning the number of FDP in host countries, military capability, mitigating the positive effect of proximate civil wars on the influxes, acts as a deterrent to the inflows, whereas the other capacities contribute to an increase in them. These findings suggest that hosting states with high capacity may find policy liberalization advantageous. Such a strategy can potentially foster positive engagement of refugees within society while maintaining control over borders and population management.