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Empirical investment equations in developing countries


  • Rama, Martin


Since the debt crisis, there has been increasing interest in the determinants of investment in developing countries. There is plentiful literature on the topic for industrial economies but existing studies on developing countries are scattered and few. The author examined those studies with the aim of answering two questions: Are the variables that influence investment decisions the same in developing as in industrial countries, or should other factors be considered because the macroeconomic setting is different? And what can be learned from the applied research that has been done on the subject? This paper presents an integrative analytical framework, including different empirical equations, that depend on the assumptions made about the economies'key features. It classifies 25 empirical studies on investments in developing countries, classifying them according to their chosen specification and comparing their estimates. The author concludes that investment decisions in developing countries are not necessarily based on the same variables as in industrial countries. Analysts must consider such additional factors as financial repression, shortage of foreign exchange, lack of infrastructure, and significant economic instability.

Suggested Citation

  • Rama, Martin, 1990. "Empirical investment equations in developing countries," Policy Research Working Paper Series 563, The World Bank.
  • Handle: RePEc:wbk:wbrwps:563

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    References listed on IDEAS

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    Cited by:

    1. Muyambiri, Brian & Chiwira, Oscar & Enowbi Batuo, Michael & Chiranga, Ngonidzashe, 2010. "The Causal Relationship between Private and Public Investment in Zimbabwe," MPRA Paper 26671, University Library of Munich, Germany.
    2. Gunter, Bernhard G., 2001. "Does the HIPC Initiative Achieve its Goal of Debt Sustainability?," WIDER Working Paper Series 100, World Institute for Development Economic Research (UNU-WIDER).
    3. Easterly, William & Schmidt-Hebbel, Klaus, 1991. "The macroeconomics of public sector deficits : a synthesis," Policy Research Working Paper Series 775, The World Bank.
    4. Mariarosaria Agostino, 2004. "Conditionality, Commitment and Investment Response in LDCs," Economics Working Papers 2004-10, Department of Economics and Business Economics, Aarhus University.
    5. Ahmed Badawi, 2003. "Private capital formation and public investment in Sudan: testing the substitutability and complementarity hypotheses in a growth framework," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(6), pages 783-799.
    6. Demir, Firat, 2007. "Private Investment, Portfolio Choice and Financialization of Real Sectors in Emerging Markets," MPRA Paper 3835, University Library of Munich, Germany, revised Jul 2007.
    7. W.J. Jansen, 2000. "The Effects of Capital Inflows in Thailand, 1980-96," DNB Staff Reports (discontinued) 46, Netherlands Central Bank.
    8. Demir, Firat, 2006. "Volatility of short term capital flows, financial anarchy and private investment in emerging markets," MPRA Paper 3080, University Library of Munich, Germany, revised May 2007.
    9. Manuel Agosin & Roberto Machado, 2005. "Foreign Investment in Developing Countries: Does it Crowd in Domestic Investment?," Oxford Development Studies, Taylor & Francis Journals, vol. 33(2), pages 149-162.
    10. M. Shahe Emran & M. Imam Alam & Forhad Shilpi, 2003. "After the "License Raj": Economic Liberalization and Aggregate Private Investment in India," Development and Comp Systems 0305002, EconWPA, revised 30 Aug 2003.
    11. Abdiweli Ali, 2001. "Political instability, policy uncertainty, and economic growth: An empirical investigation," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 29(1), pages 87-106, March.
    12. Ramón A. Castillo Ponce & Jorge Herrera Hernández, 2005. "Efecto del gasto público sobre el gasto privado en México," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 20(2), pages 173-196.
    13. Lederman, Daniel & Menendez, Ana Maria & Perry, Guillermo & Stiglitz, Joseph, 2003. "Mexican investment after the Tequila crisis: basic economics, "confidence" effects or market imperfections?," Journal of International Money and Finance, Elsevier, vol. 22(1), pages 131-151, February.
    14. Oner Guncavdi-super-˙ & Andrew McKay, 2003. "Macroeconomic adjustment and private manufacturing investment in Turkey: a time-series analysis," Applied Economics, Taylor & Francis Journals, vol. 35(18), pages 1901-1909.
    15. repec:ebl:ecbull:v:3:y:2003:i:28:p:1-16 is not listed on IDEAS
    16. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(3).


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