Editorial BoardXML

Seoul Journal of Economics - Vol. 31 , No. 3
[Paper List] [Go to Volume List]

[ Article ]
Seoul Journal of Economics - Vol. 31, No. 3, pp. 273-305
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 31 Aug 2018
Received 29 Dec 2017 Revised 19 Jul 2018 Accepted 20 Jul 2018

Indigenous Capability and Effects of Foreign Capital Flows and Repatriated Profits on Economic Growth: A Cross-country Empirical Study
Jun-ki Park
Dr. Jun-ki Park, Research Fellow, Samsung Economic Research Institute, Seocho-daero 74-gil, Seocho-gu, Seoul, Korea, Tel: +82-2-3780-8149, Fax: +82-2-3780-8006 (ryanjkp@daum.net)

JEL Classification: F21, F43, O40

Abstract

This study investigates the effects of various foreign capital flows, including repatriated profits on economic growth. I attempt to prove the hypothesis that developing countries tend to face slow economic growth because of their consistent encounters with more outbound capital flows in the form of interest payments and dividends than new inbound capital flows. The effect of these capital flows depends on the indigenous capability of each nation, such as the level of human capital and technology. Empirical analyses verify the above hypothesis. This study finds although hosting additional foreign capital improves economic growth, the accompanying repatriated profit tends to be related negatively to economic growth. Moreover, foreign capital inflow and repatriated profit have different effects on economic growth based on the development level of countries, with certain threshold values identified in terms of advanced human capital or the number of patents per million people. This study further determines this threshold is higher than that of foreign direct investments from which the host developing countries obtain positive effect. This result implies reverse financial flow out of developing countries in the form of repatriated profit, not financial flow itself, is one of the important causes of growth problems in the South.

Keywords: Economic growth, Foreign capital, Income level, Repatriated profits, Middle-income trap, Indigenous capability
References
1. ADB. Asia 2050: Realizing the Asian Century. Manila: Asian Development Bank, 2011.
2. Amsden A. Asia’s Next Giant. New York: Oxford University Press. 1989.
3. Arellano, Manuel and Olympia Bover. “Another Look at the Instrumental Variable Estimation of Error-components Models.” Journal of Econometrics 68 (No. 1 1995): 29-51.
4. Asheghian, Parviz. “Determinants of Economic Growth in the United States: The Role of Foreign Direct Investment.” The International Trade Journal 18 (No. 1 2004): 63-83.
5. Barro, J. Robert and Jong Wha Lee. “A New Data Set of Educational Attainment in the World, 1950-2010.” Journal of Development Economics 104 (2013): 184-198.
6. Blundell, Richard and Stephen Bond. “Initial Conditions and Moment Restrictions in Dynamic Panel Data Models.” Journal of Econometrics 87 (No. 1 1998): 115-143.
7. Borensztein, Eduardo Jose, De Gregorio and Jong-Wha Lee. “How does Foreign Direct Investment affect Economic Growth?” Journal of International Economics 45 (No. 1 1998): 115-135.
8. Chase-Dunn, Christopher. “The Effects of International Economic Dependence on Development and Inequality: A Cross-national Study.” American Sociological Review 40 (No. 6 1975): 720-738.
9. Durham, J. Foreign Portfolio Investment, Foreign Bank Lending, and Economic Growth. FRB International Finance Discussion Papers No. 757, 2003.
10. Durham, J. “Absorptive Capacity and the Effects of Foreign Direct Investment and Equity Foreign Portfolio Investment on Economic Growth.” European Economic Review 48 (No. 2 2004): 285-306.
11. Evans, Kimberly. Foreign Portfolio and Direct Investment: Complementarity, Differences and Integration. OECD Global Forum on International Investment in Shanghai, 2002.
12. Forte, Rosa and Rui Moura. “The Effects of Foreign Direct Investment on the Host Country's Economic Growth: Theory and Empirical Evidence.” The Singapore Economic Review 58 (No. 3 2013): 1-28.
13. IMF. Balance of Payments and International Investment Position Manual, 6th edition (BPM6). Washington DC: International Monetary Fund, 2009.
14. Jaggers, Keith and Monty G. Marshall. Polity IV Project. Center for International Development and Conflict Management, University of Maryland, 2000.
15. Jin, Furong, Keun Lee, and Yee-Kyoung Kim. “Changing Engines of Growth in China: From Exports, FDI and Marketization to Innovation and Exports.” China & World Economy 16 (No. 2 2008): 31-49.
16. Lane, R. Philip and Gian Maria Milesi-Ferretti. “The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004.” Journal of International Economics 73 (No. 2 2007): 223-250.
17. Lee, Keun. Schumpeterian Analysis of Economic Catch-up: Knowledge, Path-creation, and the Middle-income Trap. Cambridge University Press, 2013.
18. Lee, Keun and Byung-Yeon Kim. “Both Institutions and Policies Matter but Differently for Different Income Groups of Countries: Determinants of Long-run Economic Growth Revisited.” World Development 37 (No. 3 2009): 533-549.
19. Lee, Keun, Mansoo Jee, and Jong-Hak Eun. “Assessing China’s Economic Catch-up at the Firm Level and Beyond: Washington Consensus, East Asian Consensus and the Beijing Model.” Industry and Innovation 18 (No. 5 2011): 487-507.
20. Lin, J. Y. The Quest for Prosperity: How Developing Economies can take off. Princeton University Press, 2012.
21. Mohnen, P. “International R&D Spillovers and Economic Growth.” In M. Pohoja (ed.), Information Technology, Productivity and Economic Growth, Oxford: Oxford University Press, 2001.
22. Mu, Qing and Keun Lee. “Knowledge Diffusion, Market Segmentation and Technological Catch-up: The Case of the Telecommunication Industry in China.” Research policy 34 (No. 6 2005): 759-783.
23. OECD. Foreign Direct Investment for Development: Maximising Benefits, Minimising Costs. Paris: OECD, 2002.
24. Ozturk, Ilhan. “Foreign Direct Investment-growth Nexus: A Review of the Recent Literature.” International Journal of Applied Econometrics and Quantitative Studies 4 (No. 2 2007). 79-98.
25. Ram, Rati and Kevin Honglin Zhang. “Foreign Direct Investment and Economic Growth: Evidence from Cross-country Data for the 1990s.” Economic Development and Cultural Change 51 (No. 1 2002): 205-215.
26. Reinert, S. Erik How Rich Countries Got Rich ... and why Poor Countries Stay Poor. London: Constable, 2007.
27. Rodrik, Dani. “The Real Exchange Rate and Economic Growth.” Brookings Papers on Economic Activity 39 (No. 2 2008): 365-412.
28. Roy, Samrat and Kumarjit Mandal. “Empirical Evidence on the Relationship between Foreign Direct Investment and Economic Growth: A Cross-country Exploration in Asia.” Seoul Journal of Economics 25 (No. 4 2012): 413-439.
29. Rubinson, Richard. “Dependence, Government Revenue, and Economic Growth, 1955–1970.” Studies in Comparative International Development 12 (No. 2 1977): 3-28.
30. Seabra, Fernando and Lisandra Flach. “Foreign Direct Investment and Profit Outflows: A Causality Analysis for the Brazilian Economy.” Economics Bulletin 6 (No. 1 2005): 1-15.
31. Singer, Hans W. “The Distribution of Gains between Investing and Borrowing Countries.” The American Economic Review 40 (No. 2 1950): 473-485.
32. Spence, M. The Next Convergence: The Future of Economic Growth in a Multispeed World. Macmillan, 2011.
33. Wade, R. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. Princeton, NJ: Princeton University Press, 1990, 2004.
34. Williamson, J. “What Washington means by Policy Reform.” In J. Williamson (ed.), Latin American Adjustment: How much has happened?, Washington, DC: Institute for International Economics, 1990.
35. Windmeijer, Frank. “A Finite Sample Correction for the Variance of Linear Efficient Two-Step GMM Estimators.” Journal of econometrics 126 (No. 1 2005): 25-51.
36. World Bank. Global Development Finance Report. Washington, DC: The World Bank, 2001.
37. World Bank. “Robust Recovery, Rising Risks.” Escaping the Middle-Income-Trap. World Bank East Asia Pacific Economic Update, Vol. 2, Washington, DC: OECD, 2010.
38. World Bank. China 2030: Building a Modern, Harmonious, and Creative Society. Washington, DC: The World Bank, 2012.
39. Xu, Bin. “Multinational Enterprises, Technology Diffusion, and Host Country Productivity Growth.” Journal of Development Economics 62 (No. 2 2000): 477-493.
40. Yusuf, Shahid and Kaoru Nabeshima. Can Malaysia escape the Middle-income Trap? A Strategy for Penang. Policy Research Working Paper 4971, Washington, DC: The World Bank, 2009.
 

Editorial Office, Seoul Journal of Economics, Institute of Economic Research, Seoul National University 599 Gwanangno, Gwanak-gu, Seoul 151-746, Korea
Tel: +82-2-880-5434 | Fax: +82-2-888-4454 | E-mail: sje@plaza.snu.ac.kr
Copyright (c) 2020 SJE. All rights reserved.