Substitution between Foreign Capital in China, India, the Rest of the World, and Latin America

Substitution between Foreign Capital in China, India, the Rest of the World, and Latin America: Much Ado about Nothing?

This paper explores the impact of the emergence of China and India on Foreign Capital Stocks (FCS) in other economies. Using bilateral FCS data from 1990- 2003 and drawing from the Knowledge-Capital Model of multinational enterprises to control for fundamental determinants of FCS across countries, the evidence suggests that the impact of foreign capital in China and India on other countries` FCS has been positive. This finding is robust across different specifications and estimation techniques. There is surprisingly weak evidence of substitution in manufacturing FCS away from Central America/Mexico in favor of China, and from Southern Cone countries to India, but these findings are not robust to the use of alternative estimation techniques. In sum, fears of a global competition for FDI seem misplaced, and policymakers concerned about attracting foreign investors should focus their efforts on the fundamentals determinants of FDI.