Dependency, Disarticulation, and Denominator Effects: Another Look at Foreign Capital Penetration

Abstract

Less developed countries desparately need capital to develop, but countries dependent on foreign capital face slower economic growth, higher income inequality, and possibly impaired domestic capital formation. These conclusions emerge from a reassessment of Glenn Firebaugh's broad critique of capital dependency research, which exposed an important error in earlier studies. The solution charts new theoreticall ground by factoring dependency effects into the differential productivity of foreign and domestic investment and the negative externalities from foreign capital penetration. The revised formulation is applied to cross-national analyses of economic growth, decapitalization, and income inequality. The findings consistently support capital dependency theory.