Does multilateral lending aid capital accumulation? Role of intellectual capital and institutional quality

Abstract

This paper investigates whether multilateral lending is more effective in accumulating capital in countries with a higher level of innovation. Specifically, we examine the role of the World Bank or IMF financing on capital stock using data from 175 countries over the period 1970–2017, while considering different types of long-term external flows namely FDI and debt. We find that FDI as a long-term inflow influences domestic capital stock positively, but non-G7 countries, even with a higher level of innovation, are unable to benefit from greater FDI flows in boosting their capital stock, which we explain considering institutional quality differences across countries. With regard to foreign debt flows, the multilateral lending only benefits a borrowing country if it has greater level of intellectual capital or if those funds are used in financing innovative activities. Unlike short-term IMF loans, as World Bank lending tends to be directed more towards long-term development goals, they help boost productive capital. Exploiting a policy intervention with TRIPs agreement, the paper further uncovers that countries with better institutional quality and greater innovation benefit from multilateral lending in generating higher level of capital stock following TRIPs implementation.