The Impact of Foreign Capital Inflow on Economic Growth in Developing Countries

Sophannak Chorn^1, and Darith Siek²

¹Department of International Studies, Institute of Foreign Languages, Royal University of Phnom Penh, Phnom Penh, Cambodia

²Regional Polytechnic Institute TechoSen Battambang, Ministry of Labor and Vocational Training, Battambang, Cambodia

Cite this paper:
Sophannak Chorn and Darith Siek. The Impact of Foreign Capital Inflow on Economic Growth in Developing Countries. Journal of Finance and Economics. 2017; 5(3):128-135. doi: 10.12691/jfe-5-3-5

Abstract

This paper is an empirical research study examining the impact of foreign capital inflows which mainly consisting of foreign direct investment (FDI) and official development aid (ODA) on economic growth of developing countries. It is conducted to find out the one between the two forms of foreign capital inflows that has more effective and robust influence on the growth through the combination of the two catalysts into the same regression models. The study sample covers 77 developing countries from all regions classified by the World Bank from year 1997 to 2012. Ordinary Last Square (OLS) with time and entity fixed effects has been chosen as a method of running the regression, and robust function is used in regression in an attempt to control for the possible heteroscedasticity that often exists in panel data analysis. The results show that both FDI and ODA have positive and significant impacts on economic growth. Yet, FDI is seen to be more robust and statistically significant. Furthermore, the marginal impacts of FDI and ODA are not without constraint. The marginal impacts of both FDI and ODA on economic growth decrease given the rising level of initial income per head, treating other factors constant. Moreover, provided that its share of gross domestic saving increases the impact of ODA on growth would keep decreasing. The interaction term between FDI and gross domestic saving also has negative sign as portions of GDP, but the estimated coefficient is not statistically significant.

Keywords:
foreign capital inflow (FCI) foreign direct investment (FDI) official development assistance (ODA)

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