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Private capital flows to developing countries: the role of the domestic financial sector

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  • Chee-Keong Choong
  • Zulkornain Yusop
  • Siong-Hook Law

Abstract

The relationship between private capital flows and growth has been examined extensively in the literature, yet numerous controversies remain. This study examines the relationships among private capital flows (foreign direct investment and portfolio investment), financial development and economic performance in a panel of developing countries over the period 1983–2006, by employing generalized method of moments (GMM) panel data analysis. We find that these private capital flows have a positive impact on growth with a well-developed financial sector but have a negative effect in the presence of poor financial sector development. Moreover, foreign direct investment promotes economic growth via efficiency effect, while portfolio investment stimulates economic growth via investment effect. Hence, well-developed financial sectors are ones that are crucial for economic growth.

Suggested Citation

  • Chee-Keong Choong & Zulkornain Yusop & Siong-Hook Law, 2010. "Private capital flows to developing countries: the role of the domestic financial sector," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 15(4), pages 509-529.
    • Handle: RePEc:taf:rjapxx:v:15:y:2010:i:4:p:509-529
    DOI: 10.1080/13547860.2010.516173
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    References listed on IDEAS

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    1. Ashoka Mody & Assaf Razin & Efraim Sadka, 2003. "The Role of Information in Driving FDI Flows: Host-Country Tranparency and Source Country Specialization," NBER Working Papers 9662, National Bureau of Economic Research, Inc.
    2. Michael W. Klein & Giovanni Olivei, 1999. "Capital Account Liberalization, Financial Depth and Economic Growth," NBER Working Papers 7384, National Bureau of Economic Research, Inc.
    3. Carlos Arteta & Barry Eichengreen & Charles Wyplosz, 2001. "When Does Capital Account Liberalization Help More than It Hurts?," NBER Working Papers 8414, National Bureau of Economic Research, Inc.
    4. L.R. de Mello Jr., 1996. "Foreign Direct Investment, International Knowledge Transfers, and Endogenous Growth: Time Series Evidence," Studies in Economics 9610, School of Economics, University of Kent.
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    Cited by:

    1. Abdul Rashid & Fazal Husain, 2013. "Capital Inflows, Inflation, and the Exchange Rate Volatility- An Investigation for Linear and Nonlinear Causal Linkages," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 52(3), pages 183-206.
    2. Oluwatosin Adeniyi & Bello Ajide & Afees Salisu, 2015. "Foreign Capital Flows, Financial Development And Growth In Sub-Saharan Africa," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 40(3), pages 85-103, September.
    3. Nyang`oro Owen, 2017. "Working Paper 285 - Capital Inflows and Economic Growth in Sub-Saharan Africa," Working Paper Series 2409, African Development Bank.
    4. Hui Wang & Huifang Liu, 2017. "An Empirical Research of FDI Spillovers and Financial Development Threshold Effects in Different Regions of China," Sustainability, MDPI, vol. 9(6), pages 1-21, June.
    5. Fatma Zaarour, 2021. "International Financial Integration and Stock Market in Developing Countries," GATR Journals jber208, Global Academy of Training and Research (GATR) Enterprise.

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