The Effect of Foreign Capital on Domestic Investment in Togo

  • Amadou A
N/ACitations
Citations of this article
13Readers
Mendeley users who have this article in their library.

Abstract

Theoretically, openness to foreign capital can stimulate domestic investment in developing countries' or harm their economies by raising the risks of financial crises. It's why in this paper, we have analyzed the impact of foreign capital on domestic investment in Togo over the period 1970-2008. The results we have obtained by using error correction models indicate that overall foreign capital affects positively and significantly domestic investment. It also appears that foreign direct investment (FDI) and loans are the main channels through which foreign capital has a positive impact on domestic investment in Togo. The impact of portfolio investment is negative, but not significant. Introduction: In Togo, domestic resources are relatively insufficient to finance investments in economic and social sectors. Thus, economic growth rates remain so weak to allow a remarkable reduction of poverty. For instance, domestic savings rate decreased considerably since the end of 70s, going from 39.8% of the gross domestic product (GDP) in 1978 to only 4.9% in 2005. Theoretically, the access to international financial markets can thus be very beneficial for the country. Indeed, the inflows of foreign capital can result in a reduction of interest rates or increase the volume of credit available to finance investments. Foreign capital can also have an indirect effect on domestic investment through what Kose et al. (2006) call the "collateral benefits", because in order to attract foreign investors, developing countries' governments are forced to set up place good macroeconomic policies, improve political and economic governance. Loans and portfolio investments also contribute to the deepening and the expansion of financial markets. Moreover, even if they are not directly intended for capital formation, foreign loans can be used to increase or smooth consumption. This can thus stimulate the growth of GDP during the periods of decrease in the demand. In addition, foreign direct investment (FDI) can make favor the transfer of new technologies and good practices in management, and consequently involves an improvement of productivity.

Cite

CITATION STYLE

APA

Amadou, A. (2011). The Effect of Foreign Capital on Domestic Investment in Togo. International Journal of Economics and Finance, 3(5). https://doi.org/10.5539/ijef.v3n5p223

Register to see more suggestions

Mendeley helps you to discover research relevant for your work.

Already have an account?

Save time finding and organizing research with Mendeley

Sign up for free