The Role of Private Capital Flows on Gross Domestic Product of Low, Middle and High Income Group Countries.

There were many critics saying that private capital flows created financial volatility in the local financial market leading to volatile economic activity. Developing countries, therefore, face the challenge of designing economic policies and institutions to an increasingly integrated financial envi...

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Main Author:	Choong, Chee Keong
Format:	Thesis
Language:	English English
Published:	2007
Subjects:	Capital movements - Case studies
Online Access:	http://psasir.upm.edu.my/id/eprint/5047/1/FEP_2007_18.pdf
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id	my-upm-ir.5047
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spelling	my-upm-ir.50472014-08-27T06:48:53Z The Role of Private Capital Flows on Gross Domestic Product of Low, Middle and High Income Group Countries. 2007 Choong, Chee Keong There were many critics saying that private capital flows created financial volatility in the local financial market leading to volatile economic activity. Developing countries, therefore, face the challenge of designing economic policies and institutions to an increasingly integrated financial environment that secure the most benefits from capital inflows while reducing their vulnerability to sudden reversals. This dissertation addresses the role of different types of private capital, namely foreign direct investment (FDI), total foreign debt and portfolio investment in the global economy with particular reference to their effects on economic development in developing countries. The dissertation also aims to investigate to what extent the effectiveness of these private capital flows depends on the quality of financial system in the host countries. In addition, the path (or shock) of these capital flows in developing countries is also examined to provide meaningful policy implications. For example, if the private capital flows are characterized by a stationary (non-stationary, or contain a unit root), then it implies that shocks to private capital flows are temporary (permanent). To achieve these objectives, both panel unit root tests and generalised method of moments (GMM) panel data analysis are applied, covering 71 developed and developing countries over the period of 1988-2002. The empirical results indicate that: First, using three types of panel unit root tests, this study concludes that shocks to portfolio investment and foreign direct investment are temporary while total debt series is permanent in developing countries from year 1988 to 2002. Furthermore, the shock of East Asian financial crisis had significant impact in influencing the time path of these private capital flows. Second, while FDI and portfolio investment has positive and significant impact on economic growth in the countries under study depending on the stage of economic development, foreign debt have negative and significant impact in all countries under study. These findings are consistent and confirmed by using different types of financial development and stock market indicators. It seems that unfettered capital flows do not necessarily promote growth. In fact, some data suggest that foreign debt is deleterious to expansion under certain conditions. Third, the findings are in line with previous studies in the literature on private capital flows, quality of institutions and economic growth, which suggest that the consideration of institutional and financial absorptive capacity produces most of the significant results. The dissertation, therefore, suggests that for countries to benefit more from all types private capital flows, they have to achieve certain development level of domestic financial and banking sector, favouring the hypothesis that well-functioning domestic financial institutions in a recipient country is able to benefit more from private capital flows. Capital movements - Case studies 2007 Thesis http://psasir.upm.edu.my/id/eprint/5047/ http://psasir.upm.edu.my/id/eprint/5047/1/FEP_2007_18.pdf application/pdf en public phd doctoral Universiti Putra Malaysia Capital movements - Case studies Faculty Economics and Management English
institution	Universiti Putra Malaysia
collection	PSAS Institutional Repository
language	English English
topic	Capital movements - Case studies
spellingShingle	Capital movements - Case studies Choong, Chee Keong The Role of Private Capital Flows on Gross Domestic Product of Low, Middle and High Income Group Countries.
description	There were many critics saying that private capital flows created financial volatility in the local financial market leading to volatile economic activity. Developing countries, therefore, face the challenge of designing economic policies and institutions to an increasingly integrated financial environment that secure the most benefits from capital inflows while reducing their vulnerability to sudden reversals. This dissertation addresses the role of different types of private capital, namely foreign direct investment (FDI), total foreign debt and portfolio investment in the global economy with particular reference to their effects on economic development in developing countries. The dissertation also aims to investigate to what extent the effectiveness of these private capital flows depends on the quality of financial system in the host countries. In addition, the path (or shock) of these capital flows in developing countries is also examined to provide meaningful policy implications. For example, if the private capital flows are characterized by a stationary (non-stationary, or contain a unit root), then it implies that shocks to private capital flows are temporary (permanent). To achieve these objectives, both panel unit root tests and generalised method of moments (GMM) panel data analysis are applied, covering 71 developed and developing countries over the period of 1988-2002. The empirical results indicate that: First, using three types of panel unit root tests, this study concludes that shocks to portfolio investment and foreign direct investment are temporary while total debt series is permanent in developing countries from year 1988 to 2002. Furthermore, the shock of East Asian financial crisis had significant impact in influencing the time path of these private capital flows. Second, while FDI and portfolio investment has positive and significant impact on economic growth in the countries under study depending on the stage of economic development, foreign debt have negative and significant impact in all countries under study. These findings are consistent and confirmed by using different types of financial development and stock market indicators. It seems that unfettered capital flows do not necessarily promote growth. In fact, some data suggest that foreign debt is deleterious to expansion under certain conditions. Third, the findings are in line with previous studies in the literature on private capital flows, quality of institutions and economic growth, which suggest that the consideration of institutional and financial absorptive capacity produces most of the significant results. The dissertation, therefore, suggests that for countries to benefit more from all types private capital flows, they have to achieve certain development level of domestic financial and banking sector, favouring the hypothesis that well-functioning domestic financial institutions in a recipient country is able to benefit more from private capital flows.
format	Thesis
qualification_name	Doctor of Philosophy (PhD.)
qualification_level	Doctorate
author	Choong, Chee Keong
author_facet	Choong, Chee Keong
author_sort	Choong, Chee Keong
title	The Role of Private Capital Flows on Gross Domestic Product of Low, Middle and High Income Group Countries.
title_short	The Role of Private Capital Flows on Gross Domestic Product of Low, Middle and High Income Group Countries.
title_full	The Role of Private Capital Flows on Gross Domestic Product of Low, Middle and High Income Group Countries.
title_fullStr	The Role of Private Capital Flows on Gross Domestic Product of Low, Middle and High Income Group Countries.
title_full_unstemmed	The Role of Private Capital Flows on Gross Domestic Product of Low, Middle and High Income Group Countries.
title_sort	role of private capital flows on gross domestic product of low, middle and high income group countries.
granting_institution	Universiti Putra Malaysia
granting_department	Faculty Economics and Management
publishDate	2007
url	http://psasir.upm.edu.my/id/eprint/5047/1/FEP_2007_18.pdf
_version_	1747810339062284288

The Role of Private Capital Flows on Gross Domestic Product of Low, Middle and High Income Group Countries.

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