Indigenous Capability and Effects of Foreign Capital Flows and Repatriated Profits on Economic Growth: A Cross-country Empirical Study

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.