Private capital flows and economic growth

Abstract

This chapter examines various issues regarding private capital flows to Africa. By attracting private capital flows, countries with insufficient domestic savings can access an external pool of savings. The standard neoclassical economic approach predicts that in the presence of perfect factor mobility, capital would flow from rich to poor countries pending the return to investments equalizing in all countries. From a microeconomic perspective, J. H. Dunning’s ownership, location, and internalization advantage (OLI) paradigm provides an analytical framework that accommodates a variety of testable theories of foreign direct investment (FDI) determinants and the international activities of multinational enterprises (MNEs). The OLI paradigm states that the degree, geography, and manufacturing structure of MNEs’ international production are determined by the interaction and combination of ownership, location, and internalization advantages. Horizontal and vertical FDI approaches emerged in the 1980s as part of new trade theories building on industrial organization models to combine ownership and location advantages with technology and country characteristics.