Does Foreign Capital Enhance Economic Growth In Emerging Countries: Flow Decomposition Approach?

Abstract

Unlike trade liberalization, the impact of financial openness on growth is still mitigated. In fact, empirical studies focusing on effects of capital account liberalization are inconclusive, which could be due to the sample chosen, to the liberalization index or to the fact that studies take account of capital inflows as a whole which can mask substantial differences between different flow effects.

Our purpose in this paper is on one hand to re-examine the impact of capital inflows on growth by dividing these inflows into portfolio equity flows, foreign direct investment flows and debt flows and on the other hand to study if the composition of capital inflows has an importance. This work will be done by estimating a standard growth model using dynamic panel data approach.

Our main findings are first, that total capital inflows improve economic growth and so does every kind of flow taken apart; which supports the neoclassical wisdom and second, that capital inflows composition isn't important; which indicates that all inflows are substitutes in the short term.