The Role of Foreign Aids and Trade Integration in International Capital Mobility: An Application of Feldstein- Horioka Approach

In this paper, we first review shortly movements in international monetary system and various theories of capital flows including portfolio and balance of payments approaches. Then, we will focus particularly on Feldstein- Horioka (F-H) approach by which capital mobility is analyzed for 16 developing countries over 1980-2003 through a panel data method. The main objective of this paper is thus to explore the role of foreign aids and trade integration in international capital mobility through applying F-H approach in the selected developing countries. The empirical results show a significant and positive effect of foreign aids, while integration in East Asia has led to the higher rate of capital mobility in the regional. However, the cross effect of foreign aids and trade integration in East Asia and Latin America is significant but unexpected. In contrast, such effect seems to be significant and expected in West Asia so that this implies the optimal allocation of foreign resources which stimulates capital mobility and improves economic capacities through implementing trade integration.
JEL classification: F15, F21, F35, F36