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Are Net FDI Flows and Reversals of Capital Flows a Result of Output Growth?

Author

Listed:
  • Gilad Aharonovitz
  • James Miller

    (School of Economic Sciences, Washington State University)

Abstract

Literature notes many factors as affecting capital flows, but the effects of these flows over the recipient economies and the overall effect over growth are highly debatable. This study claims that although capital flows may be required for the increase in output, other forces are causing this growth and creating the demand for capital. We construct a model in which growth requires both training of managers by firms in order to expand, representing the absorption capacity of the firms, and capital for the firms’ expansion. The model shows that in early stages of development, when output is low, capital inflows are increasing with an increase in the output, but are not the cause for the output growth. However, when output is higher, an increase in the output is associated with financial outflows, since the local savings are increasing by more than the local demand for capital. We test this relationship in a large sample of countries, and manage to explain half of the variations in net FDI flows per capita using the stage of development.

Suggested Citation

  • Gilad Aharonovitz & James Miller, 2008. "Are Net FDI Flows and Reversals of Capital Flows a Result of Output Growth?," Working Papers 2009-05, School of Economic Sciences, Washington State University.
    • Handle: RePEc:wsu:wpaper:aharonovitz-2
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    File URL: http://faculty.ses.wsu.edu/WorkingPapers/Aharonovitz/WP2009-05_A-M-NetFDIFlows.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    capital flows; reversals; FDI; economic development; firms; growth; on-the-job training;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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