we do not include the investment rate in these regressions, even though
investment is an important determinant of economic growth. This has implications
for the interpretation of the effect of capital flows on growth. The coefficient on
the capital flow variables without investment captures the effect of capital flows on
growth through all possible channels, including through investment. The
coefficient on capital flow variables with investment on the other hand, captures
the effect of capital flows on growth above and beyond its effect on total
investment. When investment is included in the regression, the effect of FDI on
growth is positive but no longer statistically significant at conventional levels.
While the coefficient on portfolio flows becomes marginally smaller, it is
statistically significant at the 5 per cent level. This suggests that portfolio flows
affect economic growth above and beyond their effect on domestic investment.