Foreign capital and economic growth

A new but simple model of the impact of foreign capital–in particular foreign direct investment–on the economic growth rate of poor countries is described and tested. A feature of this model is that it aims to allow separately for structural economic effects and the direct impact on the balance of payments position. Results confirm the favourable impact of aid flows and domestic savings, but suggest that direct investment is associated with structural effects that retard growth. An attempt is made to interpret these results in a wider context than usual for the purpose of assessing possible policy implications.