Foreign Capital and Economic Growth

Brookings Papers on Economic Activity (Impact Factor: 3.41). 02/2007; 75(2007-1). DOI: 10.1353/eca.2007.0016
Source: RePEc


Nonindustrial countries that have relied more on foreign finance have not grown faster in the long run as standard theoretical models predict. The reason may lie in these countries’ limited ability to absorb foreign capital, especially because their financial systems have difficulty allocating it to productive uses, and because their currencies are prone to appreciation (and often overvaluation) when such inflows occur. The current anomaly of poor countries financing rich countries may not really hurt the former’s growth, at least conditional on their existing institutional and financial structures. Our results do not imply that foreign finance has no role in development or that all types of capital naturally flow “uphill.” Indeed, the patterns associated with foreign direct investment flows have generally been more consistent with theoretical predictions. However, we find no evidence that providing financing in excess of domestic saving is the channel through which financial integration delivers its benefits.

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Available from: Eswar S. Prasad
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    • "Many scholars emphasize the impact of FDI on the process of economic globalization (Casi & Resmini, 2012; Ford, Rork, & Elmslie, 2008; Gersbach, 2002; Sutcliffe & Glyn, 2003; Vetter, 2014) and analyze the effects of FDI on economic development (Lipsey, 2004; Loungani & Razin, 2001; Moura & Forte, 2010; Prasad, Rayan, & Subramanian, 2007; Vissak & Roolaht, 2005; Vo, 2004; Zilinske, 2010). Some authors investigate FDI attracting factors (Bevan & Estrin, 2000; Cho, 2003; Feldstein, 2000; Janicki & Wunnava, 2004; Özkan-Günay, 2011; Soubbotina & Sheram, 2000), while others try to assess the level of globalization by one or a few FDI indicators (Dreher, 2007; Kearney, 2007; Ramsey, Barakat, Cretoiu, & Sherban, 2012; United Nations Conference on Trade and Development [UNCTAD], 2002). "
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    ABSTRACT: The authors of the paper describe the features of foreign direct investment (FDI) as one of the driving forces of globalization, and its most prominent manifestation. Discussion on the causal and consequential interrelations of globalization factors leads to the clear distinction of an assessment of globalization level and evaluation of the impact of globalization on economic development. Proposed selected indicators enable to carry out a complex assessment of the level of economic globalization considering FDI factor. An analysis of selected FDI indicators for assessment of the level of globalization of a small open country is carried out in a case of Lithuanian economy. The results of the study indicate the high level of globalization and dependence of Lithuanian economy on foreign capital. The level of globalization of a small open country is more affected on inward FDI in comparison with outward investment.
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    • "7 Although structural factors, such as differences in technology, government policies and market failures, may explain this Lucas paradox, the leading proponent is that of weak institutions (Alfaro et al., 2008). Weak protection of private property rights and contract enforcement and fear of expropriation, for instance, depress investments and entrepreneurship because under such an environment investment will be riskier and its return may be lower than the investment made in the strong institutional environment (Rodrik and Subramanian, 2009; Prasad et al., 2007). Many recent empirical studies confirm that improvements in institutional quality will attract higher capital inflows (Alfaro et al., 2008; Papaioannou, 2009). "
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    • "10. Under global underinvestment (Prasad et al., 2007), saving outflows help lower global interest rates further and fuel financial bubble speculation. For example, China's high savings are said to be responsible for cheap debts, housing bubbles and financial crises elsewhere in the world (Greenspan, 2009). "
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