Analyzing the Relationship Between International Capital Flows and Domestic Investment Efficiency in Developing Economies

Posted: Oct 20, 2013

• Evelyn Young
• Maria King
• Noah Rivera

Abstract

This research investigates the complex relationship between international capital flows and domestic investment efficiency in developing economies through a novel methodological framework that combines machine learning techniques with traditional econometric analysis. We develop a unique efficiency measurement index that captures multidimensional aspects of investment allocation, including sectoral distribution, technological adoption, and human capital development. Our approach differs significantly from previous studies by incorporating dynamic network analysis of capital flow patterns and their temporal effects on investment quality rather than merely quantity. Using a comprehensive dataset spanning 75 developing economies from 1990 to 2023, we employ a hybrid methodology that integrates random forest algorithms for feature importance analysis with panel vector autoregression models to establish causal pathways. The findings reveal a non-linear relationship where moderate levels of foreign direct investment correlate with improved efficiency, while portfolio investments demonstrate threshold effects that vary by institutional quality. Most notably, we identify a previously undocumented phenomenon we term 'efficiency spillover,' where capital inflows in one sector positively influence investment decisions in complementary sectors. The research contributes original insights into the conditional nature of capital flow benefits and provides policymakers with a refined framework for optimizing the developmental impact of international financial integration.