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Interactions between Capital Inflows and Domestic Investment: Israel and Developing Economies

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  • Yoel Hecht

    (Bank of Israel)

  • Assaf Razin

    (Tel Aviv University)

  • Nitzan Gad Shinar

    (Bank of Israel)

Abstract

The purpose of this paper is to explore econometrically the interactions between domestic investment and various types of capital inflows. We estimate these interactions using an international panel data set of sixty-four countries for the period 1976-1997. Interaction exists, especially in the FDI (foreign direct investment) and loans inflows. A noteworthy finding is the significant impact of the domestic investment on FDI inflows (0.14), after controlling for other factors of these inflows. We also find that the impact of FDI inflows on domestic investment (0.68), plagued by the endogeneity and non-stationarity problems, is a bit weaker than previously suggested in the literature,. Nevertheless, in terms of impact on domestic investment, FDI inflows are ranked highest, above the other types of capital inflow. Regarding the ranking of Israel in the sample, we find that it has an above average domestic-investment country-specific dummy and a portfolio-inflow country-specific dummy, but a below average FDI country-specific dummy. We interpret this finding as an indication of the high level of development of financial institutions in Israel

Suggested Citation

  • Yoel Hecht & Assaf Razin & Nitzan Gad Shinar, 2004. "Interactions between Capital Inflows and Domestic Investment: Israel and Developing Economies," Israel Economic Review, Bank of Israel, vol. 2(2), pages 1-14.
    • Handle: RePEc:boi:isrerv:v:2:y:2004:i:2:p:1-14
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    References listed on IDEAS

    as
    1. Razin,Assaf & Sadka,Efraim, 2001. "Labor, Capital, and Finance," Cambridge Books, Cambridge University Press, number 9780521785570.
    2. Assaf Razin, 2004. "The Contribution of FDI Flows to Domestic Investment in Capacity, and Vice Versa," NBER Chapters, in: Growth and Productivity in East Asia, pages 149-176, National Bureau of Economic Research, Inc.
    3. Hausmann, Ricardo & Fernández-Arias, Eduardo, 2000. "Foreign Direct Investment: Good Cholesterol?," IDB Publications (Working Papers) 1319, Inter-American Development Bank.
    4. Barry P. Bosworth & Susan M. Collins, 1999. "Capital Flows to Developing Economies: Implications for Saving and Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 143-180.
    5. Ito, Takatoshi & Rose, Andrew K. (ed.), 2004. "Growth and Productivity in East Asia," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226386805, September.
    6. Robert E. Lipsey, 2001. "Foreign Direct Investors in Three Financial Crises," NBER Working Papers 8084, National Bureau of Economic Research, Inc.
    7. Ricardo Hausmann & Eduardo Fernández-Arias, 2000. "Foreign Direct Investment: Good Cholesterol?," Research Department Publications 4203, Inter-American Development Bank, Research Department.
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    Cited by:

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    3. Zeeshan Nezami Ansari & Muzffar Hussain Dar & Shadman Zafar, 2023. "Do capital inflows affect domestic bank credit? Empirical evidence from India," Future Business Journal, Springer, vol. 9(1), pages 1-10, December.

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