Interactions between Capital Inflows and Domestic Investment: Israel and Developing Economies

Yoel Hecht, Assaf Razin and Nitzan Gad Shinar
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Yoel Hecht: Bank of Israel
Nitzan Gad Shinar: Bank of Israel

Israel Economic Review, 2004, vol. 2, issue 2, 1-14

Abstract: The purpose of this paper is to explore econometrically the interactions between domestic investment and various types of capital inflows. We estimate these interactions using an international panel data set of sixty-four countries for the period 1976-1997. Interaction exists, especially in the FDI (foreign direct investment) and loans inflows. A noteworthy finding is the significant impact of the domestic investment on FDI inflows (0.14), after controlling for other factors of these inflows. We also find that the impact of FDI inflows on domestic investment (0.68), plagued by the endogeneity and non-stationarity problems, is a bit weaker than previously suggested in the literature,. Nevertheless, in terms of impact on domestic investment, FDI inflows are ranked highest, above the other types of capital inflow. Regarding the ranking of Israel in the sample, we find that it has an above average domestic-investment country-specific dummy and a portfolio-inflow country-specific dummy, but a below average FDI country-specific dummy. We interpret this finding as an indication of the high level of development of financial institutions in Israel

Date: 2004
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