International Capital Flow and Economic Growth: A Case of FDI in Asian Economies

International capital flow-growth nexus has identified the potential gains of FDI to recipient country only if they attain threshold level of absorptive capacities. The present study has made an effort in this direction to investigate whether international financial flow affects economic growth based on a panel data for 27 Asian economies over the period 1975-2010. This paper applies panel cointegration technique to establish the long-run equilibrium relationship between foreign direct investment and economic growth. The findings strongly suggest that though FDI is growth enhancing in Asia, yet the extent of its impact depends on the threshold levels of absorptive capacities measured by the levels of human capital and infrastructure. Those Asian economies which satisfy these threshold levels can only enjoy the benefits of FDI. Thus this study provides convincing evidence of the synchronized efforts by the Asian economies to attract FDI for their economic growth.