The Role of Foreign Capital in East Asian Industrialization, Growth and Development

Abstract

There is no dearth of literature on foreign capital inflows into East Asia. Direct foreign investment has attracted a vast amount of attention, but aid flows were an important area of analysis in the 1950s and 1960s, and during the last decade attention has shifted to bank flows and the ensuing debt issues. The large volume of writing has not, however, led to clear hypotheses about the role of foreign capital inflows in East Asia's industrialization or growth. Typically of capital flow information, the data base is conceptually and statistically weak (Table 4.1) so that attempts at quantitative empirical analysis have usually foundered or led to conflicting results. Much of the empirical literature is accordingly devoted to the microeconomic costs and benefits of capital inflows, but these are not linked to the key host and home country policies that determine their incidence and magnitudes. Although the East Asian countries represent a growing economic entity in the world economy, notably with respect to trade, in relation to global capital flows they have been to date a ‘small country’. As international capital markets developed after the Second World War, the supply of capital for international flows was largely determined by the industrial countries. ‘Low absorption’ petroleum exporters added to supply from the mid-1970s, and other developing countries including some in East Asia began to contribute to as well as borrow from international capital markets. But the East Asian countries have mainly been capital importers and price takers in the international market for capital.