Foreign Capital Inflows and Economic Growth of Developing Countries: A Critical Survey of Selected Empirical Studies

Abstract

Economists have always considered capital as the central element of the process of economic development. The straightforward view of development economists is that capital is essential for growth and its origin does not matter. Based on this view, the capital-deficient countries heavily resorted to foreign capital as the primary means to achieve rapid economic growth. Unfortunately, the growth experience of many of these countries has not been very satisfactory and, as a result, they accumulated a large external debt and are now facing serious debt servicing problems. This survey attempts to integrate major empirical studies on the macroeconomic effects of foreign capital inflows. It concludes that the results of previous studies have largely been controversial, mainly due to methodological problems and data limitations. Since most of the previous studies are cross-sectional in nature, there is a need for more country-specific case studies, due to the unique characteristics of each country and the stringent conditionalities of debt relief initiatives.