Capital Flows to Developing Economies: Implications for Saving and Investment

Abstract

THE CURRENCY CRISES that broke out in East Asia in mid-1997 have been followed by more than a year of tumult in international financial markets. These crises have had a serious impact on the emerging market economies, forcing many to raise domestic interest rates so as to stem an outflow of financial capital and prevent further exchange rate collapse. These interest rate increases have, in turn, depressed domestic economic activity. Not surprisingly, this severe financial instability has intensified discussions about the benefits and risks to developing economies from allowing capital to flow freely across national borders. 1 For many developing countries, the ability to draw upon an international pool of financial capital offers large potential benefits. Low levels of capital per worker in these countries have long held output down. Net foreign resource inflows-current account deficits-can augment private saving and help these countries reach higher rates of capital accumulation and growth. Access to international capital markets provides the means to finance those resource flows. Some types of foreign capital inflows, principally foreign direct investment (FDI), may also facilitate the transfer of

Institutions, Foreign Direct Investment, and Domestic Investment: Crowding Out or Crowding In?

“…Other scholars find that FDI stimulates (or crowds in) private domestic investment (Al-Sadig, 2013;Ramirez, 2011;Ndikumana and Verick, 2008;Tang et al, 2008;de Mello, 1999;Bosworth and Collins, 1999;Borensztein et al, 1998). Several scholars find mixed evidence when using several lags for FDI or when splitting the country sample according to geographic region (Adams (2009); Apergis et al (2006); Agosin and Mayer (2000); Misun and Tomsik (2002); Agosin and Mayer (2000)), or find no effect of FDI on domestic investment (Lipsey (2000)).…”

The Role of Information in Driving FDI Flows: Host-Country Tranparency and Source Country Specialization

“…This result is consistent with recent empirical evidence. For instance, Borenzstein, De Gregorio and Lee (1998) and Bosworth and Collins (1999) provide such evidence for a sample of developing countries during the period 1978-1995. More recently, in a sample of developing countries, Razin (forthcoming), finds that the effect of FDI inflows on domestic investment is significantly larger than either FPI or loan inflows (Appendix 1, Table 1).…”

Benefits and Costs of International Financial Integration: Theory and Facts

“…It includes those of Agosin and Mayer (2000), Bosworth and Collins (2000), Blomstrom, Lipsey and Zejan (1994), Borensztein, De Gregorio and Lee (1998), Gruben and McLeod (1998), Carkovic and Levine (2002) and Edison, Levine, Ricci and Slok (2002). Agosin and Mayer (2000), using panel data for 32 countries for the period 1970-96, found that FDI had a 'crowding in' effect on private domestic investment in Asia and to a lesser extent in Africa; by contrast, FDI had a strong 'crowding out' effect on domestic capital formation in Latin America.…”

“…Agosin and Mayer (2000), using panel data for 32 countries for the period 1970-96, found that FDI had a 'crowding in' effect on private domestic investment in Asia and to a lesser extent in Africa; by contrast, FDI had a strong 'crowding out' effect on domestic capital formation in Latin America. Bosworth and Collins (2000) used panel regression techniques to evaluate the impact of capital inflows on investment for a group of 58 developing countries during the period 1978-95. They found that FDI flows have a positive (and almost one-for-one) impact on investment, whereas portfolio flows have no discernible effect.…”