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

Author

Listed:
  • Chuquilín, Micaela

    (Universidad del Pacífico)

  • Salinas, César

    (Universidad del Pacífico)

  • Winkelried, Diego

    (Universidad del Pacífico)

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.

Suggested Citation

  • Chuquilín, Micaela & Salinas, César & Winkelried, Diego, 2015. "Foreign capital and economic growth in emerging markets: are foreign aid and foreign direct investment substitutes?," Working Papers 2015-014, Banco Central de Reserva del Perú.
    • Handle: RePEc:rbp:wpaper:2015-014
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    More about this item

    Keywords

    Foreign Direct Investment; Foreign Aid; Economic Growth; Pooled Mean Group Estimator;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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