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A Note on Foreign Capital, Economic Growth, and Convergence: A Simple Model with Endogenous Growth

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  • Miguel D. Ramirez

    (Trinity College)

Abstract

This paper examines the impact of foreign capital formation on economic growth in a simple modified model of endogenous growth. The model explicitly develops how proportional taxes on income can be used to finance government expenditures to attract foreign capital to the host nation. Another contribution of the model stems from showing how conditional convergence can be retained in the endogenous case via a hybrid model that includes foreign capital. The paper motivates the presentation of the model by discussing the potential positive (and negative) effects of inward foreign direct investment to developing economies and develops the supply and demand sides of the simple modified growth model. Also, the paper presents the transition dynamics towards the steady-state level of income under exogenous and endogenous growth and shows how conditional convergence can be retained in the hybrid model via a modified production function that converges asymptotically to the linear AK form, where A is a positive constant and K is physical capital. The paper suggests how the modified model can be used to motivate future empirical research, provided appropriate proxies are found for the variables and parameters of interest.

Suggested Citation

  • Miguel D. Ramirez, 2024. "A Note on Foreign Capital, Economic Growth, and Convergence: A Simple Model with Endogenous Growth," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 30(4), pages 413-420, November.
    • Handle: RePEc:kap:iaecre:v:30:y:2024:i:4:d:10.1007_s11294-024-09914-0
    DOI: 10.1007/s11294-024-09914-0
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    References listed on IDEAS

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    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. Brian J. Aitken & Ann E. Harrison, 2022. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 6, pages 139-152, World Scientific Publishing Co. Pte. Ltd..
    3. Kevin Honglin Zhang, 2001. "How does foreign direct investment affect economic growth in China?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 9(3), pages 679-693, November.
    4. 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.
    5. Jones, Larry E & Manuelli, Rodolfo E, 1990. "A Convex Model of Equilibrium Growth: Theory and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1008-1038, October.
    6. Ramirez, Miguel D., 2006. "Is foreign direct investment beneficial for Mexico? An empirical analysis, 1960-2001," World Development, Elsevier, vol. 34(5), pages 802-817, May.
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    More about this item

    Keywords

    Convergence; Economic Growth; Endogenous Growth; And Foreign Capital Formation;
    All these keywords.

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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