3. Capital Formation
Capital has always been considered as a central element of economic growth. The more
capital formation a country has, the more capital each worker has to work with. This increase in
capital-labor ratio will result in higher output produced by each worker, and will boost the gross
domestic product for that particular country. Therefore, higher capital formation is assumed to
result in higher GDP growth. This assumption was backed up by a critical survey on selected
empirical studies conducted by Waheed (2004). He concluded that the overall effects of foreign
capital on economic growth in most of the empirical studies were positive and the negative effects
were mainly due to methodological issues or data limitation (Waheed). The main explanation for
this finding is because foreign capital can increase domestic savings, foreign exchange earnings as
well as government revenue, and therefore promotes economic growth.