Return to Capital and Foreign Direct Investment: A Cross-Country Perspective

Abstract

Using newly available data, the paper estimates aggregate macroeconomic rates of return (ROR) for 109 countries divided into highly developed (HDC), less developed (LDC), and transition economy (TEC) groups. We then analyze the connection between the ROR and cross-country capital flows as measured by foreign direct investment (FDI). For the period of 1994-2014, we find statistically significant links between all measures of ROR and inflows of FDI associated with the prevalence of “downhill” capital flows across the world. markets along with the opening of post-communist economies may have changed this pattern. Using recently available data, we estimated the macroeconomic capital profitability for 109 developing, developed, and transition economy countries. Our analysis found a positive and statistically significant association between various measures of macroeconomic profitability and FDI. These findings are consistent with the predictions of economic theory. The positive connection between capital flows and ROR during the recent period of globalization possibly indicates the dominance of downhill investment flows as the