| Abstract: |
We provide evidence that the composition of foreign capital, measured by the
ratio foreign direct investment over total liabilities, a.ects growth directly
and through the speed of convergence. Developing countries benefit relatively
more as their initial GDP is smaller. The dataset comprises the period
1970-2004 and 96 countries, and the results are robust to di.erent measures of
the composition of foreign capital, restricted time period, developing
countries, and alternative explanations of convergence and growth. These
results are consistent with the neoclassical growth model with credit
constraints presented in this paper, in which the composition of foreign
capital a.ects the transition dynamics through a positive e.ect on the speed
of convergence and steady state GDP. |