Analyzing the Impact of International Finance on Economic Growth in Developing and Developed Economies

Abstract

This study examined the impact of international finance on economic growth in developing and developed economies by analyzing the roles of foreign direct investment (FDI), portfolio investment, remittances, and external debt. The research design used was a quantitative approach and primary data was obtained from 340 respondents which included economists, financial analysts, academics, bankers and financial policy makers. Purposive sampling method was used to choose the respondents who have relevant experience in finance and economic development. To meet the objectives of the study, descriptive statistics, correlation analysis, multiple regression analysis and one-way ANOVA were conducted. The results of the correlation tests showed that the three major components of the capital stock of developing countries, namely FDI, portfolio investment, remittances and official development assistance, were positively correlated with economic growth, whereas external debt was negatively correlated. Multiple regression analysis showed that the quantity of FDI was the most positive factor affecting economic growth (β = 0.452, p < 0.001), followed by portfolio investment (β = 0.281, p < 0.001) and remittances (β = 0.173, p = 0.010), whereas external debts had a negative impact on economic performance (β = -0.198, p < 0.001). The model accounted for 61.0% of the variation of economic growth (R² = 0.610). In addition, the ANOVA results indicated that there was a significant difference between developed and developing economy (F = 18.462, p < 0.001), with developed economies gaining more from international financial integration. The findings of the study showed that international finance is a significant contributor to economic growth if it is accompanied by strong institutions and good governance and sustainable financial policies. The results have important policy implications for those aiming to benefit as much as possible from international financial flows, while reducing the risks they pose to the economy.