The Effect of Foreign Capital Flows on Economic Growth of Developing Countries: A Panel Data Analysis

Abstract:

In recent years, with the increasing globalization, the volume of international free trade has greatly increased and international capital movements have contributed to this increase to a considerable extent. Today, developing countries are in intense competition to attract international capital to their own countries. Especially after 1980, as a result of the economic liberalization trends in the world, this competition has increased even more.
In empirical studies, it is seen that the effect of capital movements on economic growth may differ from country to country. The purpose of this study is to examine the effects of foreign capital movements on macroeconomic variables in developing countries. Developing countries seeking a solution to the high growth rate and the financing of development are seen to use their preferences in terms of external debt, foreign capital alternatives and foreign capital. Foreign capital flows affect both the macroeconomic conditions of the country in which they are going and the growth, the investment, the exchange rate, the interest rate, the banking, the savings and the volume of consumption in that country. This study aims to analyze the foreign capital flows on economic growth into developing countries using panel data analysis. The effects on them were analyzed for the period 1980-2016. As a result of the panel data analysis, the effect of short-term capital investments on economic growth was found to be negative, consistent with the theoretical and empirical literature, while the impact of foreign direct investments and portfolio investment on economic growth was positive.