Theory suggests different channels through which increased capital mobility can
enhance economic growth. Capital flows can enhance economic growth by
augmenting the domestic investment rate. In open-economy versions of
neoclassical growth models, capital flows from capital-rich to capital-poor
countries where the marginal product of capital is higher. This results in an
increase in the rate of capital accumulation and growth in the latter. This channel
emphasises the role of net capital flows. In these models, for capital flows to have
a positive influence on growth, they must augment domestically financed
investment, rather than crowd it out.