Foreign Capital, Technology and Economic Growth

Within the framework of the neoclassical growth model, this paper shows that the foreign capital inflow can improve economic conditions in the host country on a permanent basis if the fraction of foreign capital income reinvested in the host country is sufficiently greater than the saving rate of the host country. As long as the latter condition is satisfied, there exists a unique steady state equilibrium, which is asymptotically stable, and the new technology and knowledge that accompany foreign investment have a positive effect on both the steady state capital-labor ratio and the steady state proportion of foreign capital in the aggregate (economy) capital.