The Impact of Short-term and Long-term International Capital Flows on Economic Growth

Abstract

With the rapid growth of foreign direct investment (FDI) in the world, FDI plays an increasingly important role than the trade in the process of economic globalization and integration. However, the effect of international capital on economic growth is ambiguous. Moderate foreign capital inflow can solve the problem of insufficient funds in the real economy and promote the development of the virtual economy as well. Empirical analyses have shown that the impact of long-term international capital flows on economic growth is more favorable and long-lasting, but the rapid pace of short-term international capital flows has an unstable impact on a country’s economy. This study explores the impact of China’s long-term and short-term international capital flows on GDP since 1971, and the results show that both long-term and short-term international capital flows could benefit economic growth before 2011. Although short-term international capital flew out rapidly after 2012, it did not reduce the steady growth trend of China’s economy.