Foreign capital and economic growth in emerging markets: are foreign aid and foreign direct investment substitutes?

Micaela Chuquilín, César Salinas and Diego Winkelried
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Micaela Chuquilín: Universidad del Pacífico

No 2015-014, Working Papers from Banco Central de Reserva del Perú

Abstract: This paper studies the short-rum and long-run effects of foreign aid and foreign direct investment on economic growth in emerging markets. Upon applying the so-called Pooled Mean Group estimator to an unbalanced panel for 94 countries over the period 1960-2012, we find a positive and significant long-run relationship between these two types of foreign capital and growth. We then enquire which type of foreign flow is more effective to stimulate economic growth, and find that both effects are not statistically different in various dynamic specifications and robustness checks. This finding may account for a possible substitutability relationship between foreign aid and foreign direct investment in the long-run. An implication is that what matter for growth in emerging markets is the aggregate amount of foreign capital, rather than its composition.

Keywords: Foreign Direct Investment; Foreign Aid; Economic Growth; Pooled Mean Group Estimator (search for similar items in EconPapers)
JEL-codes: F21 F35 O19 O40 (search for similar items in EconPapers)
Date: 2015-12
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Persistent link: https://EconPapers.repec.org/RePEc:rbp:wpaper:2015-014

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