Foreign Portfolio Investment, Foreign Bank Lending, and Economic Growth

35 Pages Posted: 29 May 2003

Date Written: February 2003


In contrast to the empirical literature's focus on foreign direct investment (FDI), this study examines the effects of foreign portfolio investment (FPI) and "other" foreign investment (OFI) on economic growth using data on 88 countries from 1977 through 2000. Most measures suggest that FPI has no effect, and some results indicate that OFI has a negative impact on growth that is somewhat mitigated by initial financial and/or legal development. However, these results are questionable due to possible simultaneity bias. The empirical analyses also examine whether non-FDI foreign investment affects growth indirectly. FPI does not correlate positively with macroeconomic volatility, but the results indicate that the negative indirect effect of OFI through macroeconomic volatility comprises a substantial portion of the gross negative effect of OFI on growth.

Keywords: Foreign Portfolio Investment, Economic Growth, Financial Development

JEL Classification: F3, F4, O1

Suggested Citation

Durham, J. Benson, Foreign Portfolio Investment, Foreign Bank Lending, and Economic Growth (February 2003). FRB International Finance Discussion Paper No. 757. Available at SSRN: or

J. Benson Durham (Contact Author)

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