Academic journal article European Journal of Sustainable Development

Private Capital and Investment Climate for Economic Growth: Empirical Lessons Based on ARDL Bound Test Technique

Academic journal article European Journal of Sustainable Development

Private Capital and Investment Climate for Economic Growth: Empirical Lessons Based on ARDL Bound Test Technique

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Private capital and investment climate are central drivers to achieving and re- generating strong, sustainable and balanced economic growth in developing world. The main challenge for developing countries and since many years was to provide, sustain and enable business environment for domestic and foreign investments. Foreign aids, public and private capitals used by the governmental and the private sectors are stilled actually in debate since the strategy of great investments called big push (Rosenstein- Rodan, 1943; Easterly, 2005). Given the past and the current development paradigm, is the private sector with private capitals one of the key engines for economic growth in Africa? In the literature we find various typologies of capital flows. The flows can resulted from a foreign investor's decision or from a national investor's decision and can be seen as inward or outward flows, respectively.

Inward capitals bring know-how, innovative technology and increase in the country economy's productive capacity. Outward investments in other countries sometimes provide opportunities to accessing markets that maintain barriers. Such capitals help enterprises to survive in an increasingly competitive business environment. When the capitals enter the country or go away from, the economic literature captures them as inflows and outflows. In the same country, there is a coexistence of capital inflows with capital outflows. This is a widespread phenomenon in the developed world and a natural outcome of increasing global financial integration. A similar situation can be expected to prevail in developing countries. As theirs incomes and wealth increase the dependence of growth on foreign capital declines, United Nations Conference on Trade and Development (UNTACD, 2000).

Capitals can also be public, from government and official institutions, or private from individuals and particulars, enterprises and multinational firms. Tadaro (1999) considers multinational enterprises as corporations that conduct and control productive activities in more than one country. Multinational enterprises are seen as corporations with north- north, north-south or south-south capital links and which have theirs headquarters in another country such as Brazil, Britain, China, France, Germany, India, Indonesia, Japan, Korea, Mexico, Russia, and the United States, among others. Some of these countries are presented on the list of the top 10 contributors to global economic growth from 2010 to 2015, International Monetary Fund (IMF, 2010). These multinational companies also function in other countries both developed and developing.

Many varieties of private capital flows exist: there are domestic private capital, in one hand and foreign direct capital, in other hand. Domestic private capital is from private originally, individual or groups, and usually finance private sector. In the category of foreign direct capital mainly we have foreign direct investment (FDI) and portfolio investment. The distinction between FDI and portfolio investment is fundamentally the acquisition of some degree of management control. Usually, the threshold of 10 percent of total equity is used to distinguish the two components. The portfolio investments do generally not involve a controlling interest. FDI can be defining as investment by large multinational corporations with headquarters in the developed countries. FDI is not simply an international transfer of capital but rather, the extension of enterprise from its home country which involves flows of capital, innovative technologies and entrepreneurial skills to the host economy where they are combined with local factors in the production of goods and services for local and for export markets.

Enterprises usually invest up to the point where marginal efficiency of capital equals the user cost of capital. A rise in the user cost reduces optimal capital stock and investment. …

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