Growth Effects of Foreign and Domestic Investment

Abstract

Over tha past few years, numerous studies in sociology have concluded that foreign investment harms poor nations. These studies have focused on the coefficient for foreign capital stock, controlling for "flow" (new investment), and-defying logic-have inferred that a negative coefficient for stock reflects "dependency effects" that retard economic growth. Since capital stock is the denominator for investment rate, the greater the stock, the lower the investment rate, for a given level of new investment. Hence the negative coefficient for capital stock found in dependency studies indicates a beneficial investment effect, not a harmful effect. This point is demonstrated by reanalysis of the data used in dependency studies. In these data, foreign investment spurs growth. Earlier analysts have concluded otherwise only because their conclusions have belied their findings.