Foreign Capital Dependence and Development: A New Direction

Abstract

Scholars have long debated the impact of foreign investment on the economies of less developed countries. Many argue that foreign investment is beneficial for the host economy; others argue, just as forcefully, that dependence on foreign capital is detrimental. This study offers a new conceptualization of foreign capital dependence that may resolve this debate: foreign investment concentration, which is the proportion of a host country's foreign direct investment stocks owned by the single largest investing country. The theory is that high investment concentration limits the autonomy of state and business elites to act in the long-term interests of domestic growth. In a series of cross-national panel regression models of 39 less developed countries estimated at five-year intervals from 1970 to 1995, the often cited negative effects of foreign capital penetration on growth in GNP per capita are dramatically reduced or entirely replaced when investment concentration, and the related concepts of export commodity and trade partner concentrations, are included in the analyses. Foreign investment concentration has a significant, long-term negative effect on growth that is strongest over the initial five-year period and decreases over the next 15 years. A similar effect is also found for the 1990-1997 period. This structural aspect of capital dependence has a greater impact on development than does the overall level of foreign capital penetration.