The Impact of Capital Inflows of Asian Economic Growth

The dissertation attempts to explain the economic impact of capital inflow on Asian economic growth during 1980–1998 period. The study test the effects of foreign direct investment, foreign portfolio investment and short-term external debt in cross country regression framework, utilizing data on three different types of capital flows from foreign countries to selected Asian countries between 1980–1998. Foreign capital inflows play an important role in economic growth in Asian countries between 1980–1995. There are several principle results emerge from my study. The results show a positive relation exists between economic growth and gross foreign direct investment over GDP and immediate effects of gross foreign direct investment over GDP on growth rate are quite strong. Foreign direct investment has higher positive impact on growth than other types of capital flows. Gross FDI is an important vehicle for the transfer of technology. Thus, gross FDI over GDP contributes more to economic growth when a sufficient absorptive capability or human capital of the advanced technologies available in the host economy. Economic Policies should be more favorable to attract foreign direct investment (long-term commitment capital inflows) than to attract short-term capital flows or short-term debts. All regression results related to the impact of foreign portfolio investment and short-term external debt are insignificant in pooled data. However, the regression results confirmed that a negative relation exists between the growth rate of GDP and the short-term external debts over GDP in subgroup studies. Both theory and empirical suggest that one has to keep an eye on debt composition and on the ratio of short-term debt. The results also confirm that financial development is positively related with growth rate. Recent evidence and most of previous studies tends to support the view that countries with more developed financial markets grow faster. The regression results in pool cross section confirm the results. While the findings related with the effects of financial liberalization on growth are unclear. For maintaining and increasing economic growth rate and productive capital inflows, Asian countries need to stabilize the macroeconomic environment, improve human capital, facilitate financial development and gradually liberalize financial sector