Open Economies Review

, Volume 24, Issue 3, pp 371–396 | Cite as

Capital Flows and Economic Growth in the Era of Financial Integration and Crisis, 1990–2010

  • Joshua Aizenman
  • Yothin Jinjarak
  • Donghyun Park
Research Article


We investigate the relationship between economic growth and lagged international capital flows, disaggregated into FDI, portfolio investment, equity investment, and short-term debt. We follow about 100 countries during 1990–2010 when emerging markets became more integrated into the international financial system. We look at the relationship both before and after the global crisis. Our study reveals a complex and mixed picture. The relationship between growth and lagged capital flows depends on the type of flows, economic structure, and global growth patterns. We find a large and robust relationship between FDI – both inflows and outflows – and growth. The relationship between growth and equity flows is smaller and less stable. Finally, the relationship between growth and short-term debt is nil before the crisis, and negative during the crisis.


Capital flows Economic growth FDI Portfolio investment Equity investment Short-term debt Financial integration Financial crisis 

JEL codes

F43 F21 F32 



Joshua Aizenman and Yothin Jinjarak acknowledge funding from the Asian Development Bank (ADB). The views herein are entirely those of the authors. They do not necessarily represent the views of the ADB, or the NBER.


  1. Aizenman J (2004) Financial opening: evidence and policy options. In: Baldwin R and Winters A (eds) Challenges to globalization. University of Chicago Press, pp 473–498Google Scholar
  2. Aizenman J, Pinto B, Radziwill A (2007) Sources for financing domestic capital – is foreign saving a viable option for developing countries? J Int Money Finance 26(5):682–702CrossRefGoogle Scholar
  3. Alguacil M, Cuadros A and Orts V (2011) Inward FDI and growth: the role of macroeconomic and institutional environment. J Pol Model 33:481–496Google Scholar
  4. Blair HP (2003) Capital-account liberalization, the cost of capital, and economic growth. Am Econ Rev 93(2):91–96CrossRefGoogle Scholar
  5. Bordo MD, Meissner CM, Stuckler D (2010) Foreign currency debt, financial crises and economic growth: a long-run view. J Int Money Finance 29:642–665CrossRefGoogle Scholar
  6. Borensztein E, De Gregorio J, Lee J-W (1998) How does foreign direct investment affect economic growth? J Int Econ 45(1):115–135Google Scholar
  7. Bussiere M, Fratzscher M (2008) Financial openness and growth: short-run gain, long-run pain. Rev Int Econ 16(1):69–95CrossRefGoogle Scholar
  8. Carkovic M and Levine R (2002) Does foreign direct investment accelerate economic growth? manuscript, University of MinnesotaGoogle Scholar
  9. Chanda A (2005) The influence of capital controls on long run growth: where and how much? J Dev Econ 77:441–466CrossRefGoogle Scholar
  10. Choong C-K, Baharumshah AZ, Yusop Z, Habibullah MS (2010) Private capital flows, stock market and economic growth in developed and developing countries: a comparative analysis. Jpn World Econ 22:107–117CrossRefGoogle Scholar
  11. Contessi S, Weinberger A (2009) Foreign direct investment, productivity, and country growth: an overview. Fed Reserv Bank St Louis Rev 91(2):61–78Google Scholar
  12. Durham JB (2003) Foreign Portfolio Investment, foreign bank lending, and economic growth. Board of Governors of the Federal Reserve System International Finance Discussion Papers No.757, February 2003Google Scholar
  13. Durham JB (2004) Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth. Eur Econ Rev 48:285–306CrossRefGoogle Scholar
  14. Ferreira MA, Laux PA (2009) Portfolio flows, volatility and growth. J Int Money Finance 28:271–292CrossRefGoogle Scholar
  15. Gourinchas PO, Jeanne O (2006) The elusive gains from international financial integration. Rev Econ Stud 73(3):715–741CrossRefGoogle Scholar
  16. Hellmann TF, Murdock KC, Stiglitz JE (2000) Liberalization, moral hazard in banking, and prudential regulation: are capital requirements enough? Am Econ Rev 90(1):147–165CrossRefGoogle Scholar
  17. Klein MW, Olivei GP (2008) Capital account liberalization, financial depth, and economic growth. J Int Money Finance 27:861–875CrossRefGoogle Scholar
  18. Kohn M, Marion NP (1992) The implications of knowledge-based growth for the optimality of open capital markets. Can J Econ 25(4):865–883CrossRefGoogle Scholar
  19. Kose MA, Prasad ES, Terrones ME (2009) Does openness to international financial flows raise productivity growth? J Int Money Finance 28:554–580CrossRefGoogle Scholar
  20. Lin S, Sosin K (2001) Foreign debt and economic growth. Econ Transit 9(3):635–655CrossRefGoogle Scholar
  21. Lipsey RE and Sjöholm F (2004) Host country impacts of inward FDI: why such different answers? Working Paper No 19, The European Institute of Japanese StudiesGoogle Scholar
  22. McKinnon RI and Pill H (1996) Credible liberalizations and international capital flows: the overborrowing syndrome. Chapter 1 in Takatoshi Ito & Anne O. Krueger, 1996. Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5Google Scholar
  23. Prasad E, Raghuram R and Subramanian A (2007) Foreign capital and economic growth. Brookings Paper Econ Activ (1):pp 153–209Google Scholar
  24. Quinn DP, Toyoda AM (2008) Does capital account liberalization lead to growth? Rev Financ Stud 21(3):1403–1449CrossRefGoogle Scholar
  25. Reinhart C and Reinhart V (2009) Capital flow bonanzas: an encompassing view of the past and present. NBER Macroeconomics Annual, University of Chicago PressGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  • Joshua Aizenman
    • 1
    • 2
  • Yothin Jinjarak
    • 3
  • Donghyun Park
    • 4
  1. 1.Department of EconomicsUniversity of CaliforniaSanta CruzUSA
  2. 2.NBERCambridgeUSA
  3. 3.University of LondonLondonUK
  4. 4.Economics and Research DepartmentAsian Development BankMandaluyong CityPhilippines

Personalised recommendations