IDEAS home Printed from https://ideas.repec.org/p/awe/wpaper/443.html
   My bibliography  Save this paper

DO DIFFERENT TYPES OF CAPITAL INFLOWS HAVE DIFFERENTIAL IMPACT ON OUTPUT? Evidence from Time series and Panel Analysis

Author

Listed:
  • Bhavesh Garg
  • Pravakar Sahoo

    (Institute of Economic Growth, Delhi)

Abstract

Emerging market economies have experienced an unprecedented rise in cross-border capital flows and the existing literature provides us evidence of both expansionary and contractionary effects of inflows on domestic output. In this context, we make an attempt to answer the following questions: (1) Do capital inflows lead to expansionary or contractionary effect on emerging countries? (2) Do different types of capital inflows have different impacts? and (3) Do absorptive capacities influence the effect of capital flows on the host countries? To answer these questions, we carry out a comparative analysis for India and China using quarterly data for the period 1998Q1 to 2020Q1. The results reveal that total gross capital inflows as well as disaggregated capital inflows exhibit expansionary effect on domestic output in case of both India and China. We supplement the time series data with panel analysis for the top ten capital flows recipient EMEs over the period 1998-2019. We find that capital inflows a t aggregate level and also at the disaggregate level except debt flows have an expansionary effect on output.

Suggested Citation

  • Bhavesh Garg & Pravakar Sahoo, 2021. "DO DIFFERENT TYPES OF CAPITAL INFLOWS HAVE DIFFERENTIAL IMPACT ON OUTPUT? Evidence from Time series and Panel Analysis," IEG Working Papers 443, Institute of Economic Growth.
    • Handle: RePEc:awe:wpaper:443
    as

    Download full text from publisher

    File URL: https://iegindia.org/upload/publication/Workpap/wp443.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Obstfeld, Maurice, 1994. "Risk-Taking, Global Diversification, and Growth," American Economic Review, American Economic Association, vol. 84(5), pages 1310-1329, December.
    2. Pravakar Sahoo & Geethanjali Nataraj & Ranjan Kumar Dash, 2014. "Foreign Direct Investment in South Asia," Springer Books, Springer, edition 127, number 978-81-322-1536-3, December.
    3. Assaf Razin & Efraim Sadka & Chi-Wa Yuen, 1999. "An Information-Based Model of Foreign Direct Investment: The Gains from Trade Revisited," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(4), pages 579-596, November.
    4. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, July.
    5. Markusen, James R. & Venables, Anthony J., 1999. "Foreign direct investment as a catalyst for industrial development," European Economic Review, Elsevier, vol. 43(2), pages 335-356, February.
    6. Henrik Hansen & John Rand, 2006. "On the Causal Links Between FDI and Growth in Developing Countries," The World Economy, Wiley Blackwell, vol. 29(1), pages 21-41, January.
    7. Shang-Jin Wei, 1995. "The Open Door Policy and China's Rapid Growth: Evidence from City-Level Data," NBER Chapters, in: Growth Theories in Light of the East Asian Experience, pages 73-104, National Bureau of Economic Research, Inc.
    8. Balasubramanyam, V N & Salisu, M & Sapsford, David, 1996. "Foreign Direct Investment and Growth in EP and IS Countries," Economic Journal, Royal Economic Society, vol. 106(434), pages 92-105, January.
    9. Robin Koepke, 2019. "What Drives Capital Flows To Emerging Markets? A Survey Of The Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 33(2), pages 516-540, April.
    10. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
    11. Jack Strauss & Mark E. Wohar, 2004. "The Linkage between Prices, Wages, and Labor Productivity: A Panel Study of Manufacturing Industries," Southern Economic Journal, John Wiley & Sons, vol. 70(4), pages 920-941, April.
    12. Laureti, Lucio & Postiglione, Paolo, 2005. "The effects of capital inflows on the economic growth in the Med Area," Journal of Policy Modeling, Elsevier, vol. 27(7), pages 839-851, October.
    13. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, 2004. "Some cautions on the use of panel methods for integrated series of macroeconomic data," Econometrics Journal, Royal Economic Society, vol. 7(2), pages 322-340, December.
    14. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(3), pages 717-737.
    15. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-558, June.
    16. Levine, Ross & Zervos, Sara, 1998. "Capital Control Liberalization and Stock Market Development," World Development, Elsevier, vol. 26(7), pages 1169-1183, July.
    17. Jorge Bermejo Carbonell & Richard A. Werner, 2018. "Does Foreign Direct Investment Generate Economic Growth? A New Empirical Approach Applied to Spain," Economic Geography, Taylor & Francis Journals, vol. 94(4), pages 425-456, August.
    18. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
    19. Kevin Honglin Zhang, 2001. "How does foreign direct investment affect economic growth in China?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 9(3), pages 679-693, November.
    20. Peter Blair Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Journal of Economic Literature, American Economic Association, vol. 45(4), pages 887-935, December.
    21. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
    22. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
    23. Bhavesh Garg & K.P. Prabheesh, 2018. "External shocks, consumption-smoothing and capital mobility in India: evidence from an intertemporal optimization approach," Applied Economics, Taylor & Francis Journals, vol. 50(45), pages 4814-4829, September.
    24. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
    25. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
    26. Soto, Marcelo, 2003. "Taxing capital flows: an empirical comparative analysis," Journal of Development Economics, Elsevier, vol. 72(1), pages 203-221, October.
    27. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, 2005. "Testing for PPP: Should we use panel methods?," Empirical Economics, Springer, vol. 30(1), pages 77-91, January.
    28. Obstfeld, Maurice, 2012. "Financial flows, financial crises, and global imbalances," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 469-480.
    29. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    30. Parantap Basu & Chandana Chakraborty & Derrick Reagle, 2003. "Liberalization, FDI, and Growth in Developing Countries: A Panel Cointegration Approach," Economic Inquiry, Western Economic Association International, vol. 41(3), pages 510-516, July.
    31. Gutierrez, Luciano, 2003. "On the power of panel cointegration tests: a Monte Carlo comparison," Economics Letters, Elsevier, vol. 80(1), pages 105-111, July.
    32. Neil R. Ericsson & John S. Irons & Ralph W. Tryon, 2001. "Output and inflation in the long run," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 241-253.
    33. Barry Eichengreen & David Leblang, 2003. "Capital account liberalization and growth: was Mr. Mahathir right?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(3), pages 205-224.
    34. Peter Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Discussion Papers 07-004, Stanford Institute for Economic Policy Research.
    35. Rand, John & Tarp, Finn, 2002. "Business Cycles in Developing Countries: Are They Different?," World Development, Elsevier, vol. 30(12), pages 2071-2088, December.
    36. Paul Krugman, 2014. "Currency Regimes, Capital Flows, and Crises," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(4), pages 470-493, November.
    37. Ross Levine, 2001. "International Financial Liberalization and Economic Growth," Review of International Economics, Wiley Blackwell, vol. 9(4), pages 688-702, November.
    38. Niels Hermes & Robert Lensink, 2003. "Foreign direct investment, financial development and economic growth," Journal of Development Studies, Taylor & Francis Journals, vol. 40(1), pages 142-163.
    39. Goodfriend, Marvin & McDermott, John, 1998. "Industrial Development and the Convergence Question," American Economic Review, American Economic Association, vol. 88(5), pages 1277-1289, December.
    40. Christian Saborowski, 2011. "Can financial development cure the Dutch disease?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 16(3), pages 218-236, July.
    41. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
    42. Gregory C. Reinsel & Sung K. Ahn, 1992. "Vector Autoregressive Models With Unit Roots And Reduced Rank Structure:Estimation. Likelihood Ratio Test, And Forecasting," Journal of Time Series Analysis, Wiley Blackwell, vol. 13(4), pages 353-375, July.
    43. Helmut Reisen & Marcelo Soto, 2001. "Which Types of Capital Inflows Foster Developing‐Country Growth?," International Finance, Wiley Blackwell, vol. 4(1), pages 1-14.
    44. Paresh Kumar Narayan & Stephan Popp, 2010. "A new unit root test with two structural breaks in level and slope at unknown time," Journal of Applied Statistics, Taylor & Francis Journals, vol. 37(9), pages 1425-1438.
    45. Fedderke, J.W. & Romm, A.T., 2006. "Growth impact and determinants of foreign direct investment into South Africa, 1956-2003," Economic Modelling, Elsevier, vol. 23(5), pages 738-760, September.
    46. Robin L. Lumsdaine & David H. Papell, 1997. "Multiple Trend Breaks And The Unit-Root Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 212-218, May.
    47. Olivier Blanchard & Jonathan D. Ostry & Atish R. Ghosh & Marcos Chamon, 2017. "Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(3), pages 563-585, August.
    48. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    49. Durham, J.B.J. Benson, 2004. "Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth," European Economic Review, Elsevier, vol. 48(2), pages 285-306, April.
    50. Nair-Reichert, Usha & Weinhold, Diana, 2001. "Causality Tests for Cross-Country Panels: A New Look at FDI and Economic Growth in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(2), pages 153-171, May.
    51. Baharumshah, Ahmad Zubaidi & Thanoon, Marwan Abdul-Malik, 2006. "Foreign capital flows and economic growth in East Asian countries," China Economic Review, Elsevier, vol. 17(1), pages 70-83.
    52. Archanun Kohpaiboon, 2003. "Foreign trade regimes and the FDI-Growth Nexus: a case study of Thailand," Journal of Development Studies, Taylor & Francis Journals, vol. 40(2), pages 55-69.
    53. KH Zhang, 2001. "Does Foreign Direct Investment Promote Economic Growth? Evidence From East Asia And Latin America," Contemporary Economic Policy, Western Economic Association International, vol. 19(2), pages 175-185, April.
    54. Garg, Bhavesh & Prabheesh, K.P., 2021. "Testing the intertemporal sustainability of current account in the presence of endogenous structural breaks: Evidence from the top deficit countries," Economic Modelling, Elsevier, vol. 97(C), pages 365-379.
    55. Xiaohui Liu & Peter Burridge & P. J. N. Sinclair, 2002. "Relationships between economic growth, foreign direct investment and trade: evidence from China," Applied Economics, Taylor & Francis Journals, vol. 34(11), pages 1433-1440.
    56. Paresh Kumar Narayan & Stephan Popp, 2013. "Size and power properties of structural break unit root tests," Applied Economics, Taylor & Francis Journals, vol. 45(6), pages 721-728, February.
    57. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    58. Usha Nair‐Reichert & Diana Weinhold, 2001. "Causality Tests for Cross‐Country Panels: a New Look at FDI and Economic Growth in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(2), pages 153-171, May.
    59. Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
    60. Junsoo Lee & Mark C. Strazicich, 2003. "Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1082-1089, November.
    61. Luciano Gutierrez, 2002. "On the power of panel cointegration tests: A Monte Carlo comparison. Economics Letters, 80(1):105-111," Econometrics 0211003, University Library of Munich, Germany, revised 20 May 2003.
    62. Ana Cuadros & Vicente Orts & Maite Alguacil, 2004. "Openness and Growth: Re-Examining Foreign Direct Investment, Trade and Output Linkages in Latin America," Journal of Development Studies, Taylor & Francis Journals, vol. 40(4), pages 167-192.
    63. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    64. McKinnon, Ronald I & Pill, Huw, 1997. "Credible Economic Liberalizations and Overborrowing," American Economic Review, American Economic Association, vol. 87(2), pages 189-193, May.
    65. Omran Mohammed & Bolbol Ali, 2003. "Foreign Direct Investment, Financial Development, and Economic Growth: Evidence from the Arab Countries," Review of Middle East Economics and Finance, De Gruyter, vol. 1(3), pages 37-55, December.
    66. sahoo, satyabrata, 2021. "The Level of Entrepreneurship in India," OSF Preprints 6x2hm, Center for Open Science.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dierk Herzer & Stephan Klasen & Felicitas Nowak-Lehmann D., 2006. "In search of FDI-led growth in developing countries," Ibero America Institute for Econ. Research (IAI) Discussion Papers 150, Ibero-America Institute for Economic Research.
    2. Herzer, Dierk & Klasen, Stephan & Nowak-Lehmann D., Felicitas, 2008. "In search of FDI-led growth in developing countries: The way forward," Economic Modelling, Elsevier, vol. 25(5), pages 793-810, September.
    3. Choong, Chee-Keong & Baharumshah, Ahmad Zubaidi & Yusop, Zulkornain & Habibullah, Muzafar Shah, 2010. "Private capital flows, stock market and economic growth in developed and developing countries: A comparative analysis," Japan and the World Economy, Elsevier, vol. 22(2), pages 107-117, March.
    4. William R. Cline, 2010. "Financial Globalization, Economic Growth, and the Crisis of 2007-09," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 499, October.
    5. Bashir Ahmad Joo & Sana Shawl, 2023. "Understanding the Relationship Between Foreign Direct Investment and Economic Growth in BRICS: Panel ARDL Approach," Vikalpa: The Journal for Decision Makers, , vol. 48(2), pages 100-113, June.
    6. Stefanie Kleimeier & Roald Versteeg, 2010. "Project finance as a driver of economic growth in low‐income countries," Review of Financial Economics, John Wiley & Sons, vol. 19(2), pages 49-59, April.
    7. Soto, Marcelo, 2003. "Taxing capital flows: an empirical comparative analysis," Journal of Development Economics, Elsevier, vol. 72(1), pages 203-221, October.
    8. Chung‐Hua Shen & Chien‐Chiang Lee & Chi‐Chuan Lee, 2010. "What Makes International Capital Flows Promote Economic Growth? An International Cross‐Country Analysis," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(5), pages 515-546, November.
    9. Zaiter Lahimer, Mahjouba, 2011. "L’impact des entrées de capitaux privés sur la croissance économique dans les pays en développement," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/7670 edited by Sterdyniak, Henri.
    10. Igan, Deniz & Kutan, Ali M. & Mirzaei, Ali, 2020. "The real effects of capital inflows in emerging markets," Journal of Banking & Finance, Elsevier, vol. 119(C).
    11. Chee-Keong Choong, 2012. "Does domestic financial development enhance the linkages between foreign direct investment and economic growth?," Empirical Economics, Springer, vol. 42(3), pages 819-834, June.
    12. Pitz, Mónika & Balatoni, András, 2012. "A működőtőke hatása a bruttó nemzeti jövedelemre Magyarországon [The effect of direct investment on Hungary s gross national income]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 1-30.
    13. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
    14. Clark Don P. & Highfill Jannett & de Oliveira Campino Jonas & Rehman Scheherazade S., 2011. "FDI, Technology Spillovers, Growth, and Income Inequality: A Selective Survey," Global Economy Journal, De Gruyter, vol. 11(2), pages 1-44, July.
    15. Samargandi, Nahla & Fidrmuc, Jan & Ghosh, Sugata, 2015. "Is the Relationship Between Financial Development and Economic Growth Monotonic? Evidence from a Sample of Middle-Income Countries," World Development, Elsevier, vol. 68(C), pages 66-81.
    16. Dalila NICET-CHENAF & Eric ROUGIER, 2009. "FDI and growth: A new look at a still puzzling issue," Cahiers du GREThA (2007-2019) 2009-13, Groupe de Recherche en Economie Théorique et Appliquée (GREThA).
    17. Muhammad Arshad Khan, 2007. "Foreign Direct Investment and Economic Growth: The Role of Domestic Financial Sector," PIDE-Working Papers 2007:18, Pakistan Institute of Development Economics.
    18. James Ang, 2009. "Foreign direct investment and its impact on the Thai economy: the role of financial development," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 33(3), pages 316-323, July.
    19. Imene Debbiche, 2020. "Foreign Capital Inflows and Economic Growth in GCC Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 10(5), pages 203-210.
    20. Laura Alfaro & Areendam Chanda & Sebnem Kalemli-Ozcan & Selin Sayek, 2006. "How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on Linkages," DEGIT Conference Papers c011_023, DEGIT, Dynamics, Economic Growth, and International Trade.

    More about this item

    Keywords

    Gross capital inflows; FDI; Emerging economies; Structural breaks;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:awe:wpaper:443. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/iegggin.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.