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A Survey of the Econometric Literature on the Real Effects of International Capital Flows in Lower Income Countries

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J Benson Durham

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Abstract

This review examines the empirical literature on financial flows and economic performance, with particular respect to foreign direct investment (FDI), foreign portfolio investment (FPI), and foreign bank lending (FBL). Few studies report unequivocal positive statistical relations between flows and performance. Instead, even generally benevolent perspectives on liberalisation suggest that lower income countries should exhibit sufficient 'absorptive capacity' vis-à-vis variables such as the initial level of income, education, or trade openness. Notably, lower income countries are less likely to meet such 'thresholds'. But, before drawing definitive conclusions, shortcomings beset inference from existing studies. For example, the literature ignores the initial level of financial development in host countries, a potentially important intervening variable. Also, previous results likely suffer from specification bias, as few studies produce a standard set of control variables.

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Cited by:
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  1. Axel Dreher, 2002. "Does Globalization Affect Growth?," Development and Comp Systems 0210004, EconWPA, revised 04 Feb 2003. [Downloadable!]
  2. Alexander Cobham, . "Capital Account Liberalisation and Poverty," QEH Working Papers qehwps70, Queen Elizabeth House, University of Oxford. [Downloadable!]
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