IDEAS home Printed from https://ideas.repec.org/a/bla/scotjp/v57y2010i5p515-546.html
   My bibliography  Save this article

What Makes International Capital Flows Promote Economic Growth? An International Cross‐Country Analysis

Author

Listed:
  • Chung‐Hua Shen
  • Chien‐Chiang Lee
  • Chi‐Chuan Lee

Abstract

This paper re‐examines the relationship between international capital flows and economic growth within the context of various ‘conditional factors’ that possibly have the potential to influence such relationships. It achieves this by employing panel data for 80 countries that cover 1976–2007. International capital inflow is broken down into foreign direct investments (FDI) and foreign portfolio investments (FPI). We find interesting evidence that only FDI has a positive effect on growth and that FPI has an unfavorable, if not negative, effect on growth. The conditional variables of banking liberalization, high‐income level, twin crises, lower corruption, and human capital mitigate the positive impacts of FDI on growth. In contrast, the middle‐income level and good shareholder protection have a positive effect. As concerns FPI, the level of financial liberalization, being in a Latin American region, the wealth of countries, and market governance all influence the way that FPI affects growth, whereas the conditional variables of twin crises and human capital do not influence the effect of FPI on economic growth.

Suggested Citation

  • Chung‐Hua Shen & Chien‐Chiang Lee & Chi‐Chuan Lee, 2010. "What Makes International Capital Flows Promote Economic Growth? An International Cross‐Country Analysis," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(5), pages 515-546, November.
    • Handle: RePEc:bla:scotjp:v:57:y:2010:i:5:p:515-546
    DOI: 10.1111/j.1467-9485.2010.00529.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1467-9485.2010.00529.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1467-9485.2010.00529.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Manning Mark J, 2003. "Finance Causes Growth: Can We Be So Sure?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-24, December.
    3. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 565-613, April.
    4. Jong Il Choe, 2003. "Do Foreign Direct Investment and Gross Domestic Investment Promote Economic Growth?," Review of Development Economics, Wiley Blackwell, vol. 7(1), pages 44-57, February.
    5. Glauco de Vita & Khine Kyaw, 2009. "Growth effects of FDI and portfolio investment flows to developing countries: a disaggregated analysis by income levels," Applied Economics Letters, Taylor & Francis Journals, vol. 16(3), pages 277-283.
    6. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
    7. Kaminsky, Graciela L. & Reinhart, Carmen M., 2002. "Financial markets in times of stress," Journal of Development Economics, Elsevier, vol. 69(2), pages 451-470, December.
    8. Calderon, Cesar & Liu, Lin, 2003. "The direction of causality between financial development and economic growth," Journal of Development Economics, Elsevier, vol. 72(1), pages 321-334, October.
    9. Elizabeth Asiedu, 2006. "Foreign Direct Investment in Africa: The Role of Natural Resources, Market Size, Government Policy, Institutions and Political Instability," The World Economy, Wiley Blackwell, vol. 29(1), pages 63-77, January.
    10. Henrik Hansen & John Rand, 2006. "On the Causal Links Between FDI and Growth in Developing Countries," The World Economy, Wiley Blackwell, vol. 29(1), pages 21-41, January.
    11. Balasubramanyam, V N & Salisu, M & Sapsford, David, 1996. "Foreign Direct Investment and Growth in EP and IS Countries," Economic Journal, Royal Economic Society, vol. 106(434), pages 92-105, January.
    12. Holger Görg & David Greenaway, 2016. "Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment?," World Scientific Book Chapters, in: MULTINATIONAL ENTERPRISES AND HOST COUNTRY DEVELOPMENT Volume 53: World Scientific Studies in International Economics, chapter 9, pages 163-189, World Scientific Publishing Co. Pte. Ltd..
    13. Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian, 2007. "Foreign Capital and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 153-230.
    14. M Ayhan Kose, 2009. "Frontiers of Research on Financial Globalization," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 1-7, April.
    15. James B. Ang, 2008. "A Survey Of Recent Developments In The Literature Of Finance And Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 22(3), pages 536-576, July.
    16. de Mello, Luiz R, Jr, 1999. "Foreign Direct Investment-Led Growth: Evidence from Time Series and Panel Data," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 133-151, January.
    17. De Gregorio, Jose & Guidotti, Pablo E., 1995. "Financial development and economic growth," World Development, Elsevier, vol. 23(3), pages 433-448, March.
    18. Kaminsky, Graciela L & Reinhart, Carmen M, 1998. "Financial Crises in Asia and Latin America: Then and Now," American Economic Review, American Economic Association, vol. 88(2), pages 444-448, May.
    19. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084, Central Bank of Chile.
    20. Kose, M. Ayhan & Prasad, Eswar & Rogoff, Kenneth & Wei, Shang-Jin, 2010. "Financial Globalization and Economic Policies," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4283-4359, Elsevier.
    21. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-558, June.
    22. Li, Xiaoying & Liu, Xiaming, 2005. "Foreign Direct Investment and Economic Growth: An Increasingly Endogenous Relationship," World Development, Elsevier, vol. 33(3), pages 393-407, March.
    23. John Driffill, 2003. "Growth and Finance," Manchester School, University of Manchester, vol. 71(4), pages 363-380, July.
    24. Edison, Hali J. & Levine, Ross & Ricci, Luca & Slok, Torsten, 2002. "International financial integration and economic growth," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 749-776, November.
    25. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
    26. Masten, Arjana Brezigar & Coricelli, Fabrizio & Masten, Igor, 2008. "Non-linear growth effects of financial development: Does financial integration matter?," Journal of International Money and Finance, Elsevier, vol. 27(2), pages 295-313, March.
    27. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    28. Felix Rioja & Neven Valev, 2004. "Finance and the Sources of Growth at Various Stages of Economic Development," Economic Inquiry, Western Economic Association International, vol. 42(1), pages 127-140, January.
    29. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
    30. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    31. Barro, Robert J. & Lee, Jong-Wha, 1993. "International comparisons of educational attainment," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 363-394, December.
    32. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2005. "Does financial liberalization spur growth?," Journal of Financial Economics, Elsevier, vol. 77(1), pages 3-55, July.
    33. Shen, Chung-Hua & Lee, Chien-Chiang, 2006. "Same Financial Development Yet Different Economic Growth: Why?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1907-1944, October.
    34. Parantap Basu & Chandana Chakraborty & Derrick Reagle, 2003. "Liberalization, FDI, and Growth in Developing Countries: A Panel Cointegration Approach," Economic Inquiry, Western Economic Association International, vol. 41(3), pages 510-516, July.
    35. Xavier Sala-I-Martin & Gernot Doppelhofer & Ronald I. Miller, 2004. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," American Economic Review, American Economic Association, vol. 94(4), pages 813-835, September.
    36. Glick,Reuven & Moreno,Ramon & Spiegel,Mark M. (ed.), 2001. "Financial Crises in Emerging Markets," Cambridge Books, Cambridge University Press, number 9780521800204, September.
    37. Paul Wachtel, 2003. "How much do we really know about growth and finance?," Economic Review, Federal Reserve Bank of Atlanta, vol. 88(Q1), pages 33-47.
    38. Niels Hermes & Robert Lensink, 2003. "Foreign direct investment, financial development and economic growth," Journal of Development Studies, Taylor & Francis Journals, vol. 40(1), pages 142-163.
    39. Steven Globerman & Daniel Shapiro, 2003. "Governance infrastructure and US foreign direct investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 34(1), pages 19-39, January.
    40. Durham, J.B.J. Benson, 2004. "Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth," European Economic Review, Elsevier, vol. 48(2), pages 285-306, April.
    41. Reuven Glick & Ramon Moreno & Mark M. Spiegel, 2001. "Financial crises in emerging markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar.23.
    42. KH Zhang, 2001. "Does Foreign Direct Investment Promote Economic Growth? Evidence From East Asia And Latin America," Contemporary Economic Policy, Western Economic Association International, vol. 19(2), pages 175-185, April.
    43. Graciela Laura Kaminsky & Sergio L. Schmukler, 2008. "Short-Run Pain, Long-Run Gain: Financial Liberalization and Stock Market Cycles," Review of Finance, European Finance Association, vol. 12(2), pages 253-292.
    44. Mohsin Habib & Leon Zurawicki, 2002. "Corruption and Foreign Direct Investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 33(2), pages 291-307, June.
    45. Usha Nair‐Reichert & Diana Weinhold, 2001. "Causality Tests for Cross‐Country Panels: a New Look at FDI and Economic Growth in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(2), pages 153-171, May.
    46. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
    47. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    48. Kose, M. Ayhan & Prasad, Eswar S. & Terrones, Marco E., 2009. "Does financial globalization promote risk sharing?," Journal of Development Economics, Elsevier, vol. 89(2), pages 258-270, July.
    49. Rousseau, P. L. & Wachtel, P., 2000. "Equity markets and growth: Cross-country evidence on timing and outcomes, 1980-1995," Journal of Banking & Finance, Elsevier, vol. 24(12), pages 1933-1957, December.
    50. Omran Mohammed & Bolbol Ali, 2003. "Foreign Direct Investment, Financial Development, and Economic Growth: Evidence from the Arab Countries," Review of Middle East Economics and Finance, De Gruyter, vol. 1(3), pages 37-55, December.
    51. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zaiter Lahimer, Mahjouba, 2011. "L’impact des entrées de capitaux privés sur la croissance économique dans les pays en développement," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/7670 edited by Sterdyniak, Henri.
    2. Kose, M. Ayhan & Prasad, Eswar & Rogoff, Kenneth & Wei, Shang-Jin, 2010. "Financial Globalization and Economic Policies," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4283-4359, Elsevier.
    3. M. Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(2), pages 143-197.
    4. Stefanie Kleimeier & Roald Versteeg, 2010. "Project finance as a driver of economic growth in low‐income countries," Review of Financial Economics, John Wiley & Sons, vol. 19(2), pages 49-59, April.
    5. Chee-Keong Choong, 2012. "Does domestic financial development enhance the linkages between foreign direct investment and economic growth?," Empirical Economics, Springer, vol. 42(3), pages 819-834, June.
    6. Baiashvili, Tamar & Gattini, Luca, 2020. "Impact of FDI on economic growth: The role of country income levels and institutional strength," EIB Working Papers 2020/02, European Investment Bank (EIB).
    7. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
    8. Samargandi, Nahla & Fidrmuc, Jan & Ghosh, Sugata, 2015. "Is the Relationship Between Financial Development and Economic Growth Monotonic? Evidence from a Sample of Middle-Income Countries," World Development, Elsevier, vol. 68(C), pages 66-81.
    9. Bhavesh Garg & Pravakar Sahoo, 2021. "DO DIFFERENT TYPES OF CAPITAL INFLOWS HAVE DIFFERENTIAL IMPACT ON OUTPUT? Evidence from Time series and Panel Analysis," IEG Working Papers 443, Institute of Economic Growth.
    10. Laurent Cavenaile & Christian Gengenbach & Franz Palm, 2014. "Stock Markets, Banks and Long Run Economic Growth: A Panel Cointegration-Based Analysis," De Economist, Springer, vol. 162(1), pages 19-40, March.
    11. Gehringer, Agnieszka, 2013. "Financial liberalization, financial development and productivity growth: An overview," Economics Discussion Papers 2013-46, Kiel Institute for the World Economy (IfW Kiel).
    12. Beugelsdijk, Sjoerd & Smeets, Roger & Zwinkels, Remco, 2008. "The impact of horizontal and vertical FDI on host's country economic growth," International Business Review, Elsevier, vol. 17(4), pages 452-472, August.
    13. William R. Cline, 2010. "Financial Globalization, Economic Growth, and the Crisis of 2007-09," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 499, April.
    14. Michiel Bijlsma & Andrei Dubovik, 2014. "Banks, Financial Markets and Growth in Developed Countries: a Survey of the empirical literature," CPB Discussion Paper 266.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    15. Burcu Türkcan & Alper Duman & I. Hakan Yetkiner, 2008. "How Does FDI and Economic Growth Affect Each Other? The OECD Case," Papers of the Annual IUE-SUNY Cortland Conference in Economics, in: Oguz Esen & Ayla Ogus (ed.), Proceedings of the Conference on Emerging Economic Issues in a Globalizing World, pages 21-40, Izmir University of Economics.
    16. Clark Don P. & Highfill Jannett & de Oliveira Campino Jonas & Rehman Scheherazade S., 2011. "FDI, Technology Spillovers, Growth, and Income Inequality: A Selective Survey," Global Economy Journal, De Gruyter, vol. 11(2), pages 1-44, July.
    17. Pineli, Andre & Narula, Rajneesh & Belderbos, Rene, 2019. "FDI, multinationals and structural change in developing countries," MERIT Working Papers 2019-004, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    18. Kose,Ayhan & Ohnsorge,Franziska Lieselotte & Ye,Lei Sandy & Islamaj,Ergys, 2017. "Weakness in investment growth : causes, implications and policy responses," Policy Research Working Paper Series 7990, The World Bank.
    19. Michiel Bijlsma & Andrei Dubovik, 2014. "Banks, Financial Markets and Growth in Developed Countries: a Survey of the empirical literature," CPB Discussion Paper 266, CPB Netherlands Bureau for Economic Policy Analysis.
    20. Zouheir Abida & Imen Mohamed Sghaier & Nahed Zghidi, 2015. "Financial Development and Economic Growth: Evidence from North African Countries," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 2, pages 17-33, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:scotjp:v:57:y:2010:i:5:p:515-546. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/sesssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.