Effects of External Money Inflow on Economic Growth in Pacific Island States

Abstract: External money inflows in form of FDI, ODA, and remittances make up for a substantial share of GDP in PICs. In this dissertation, the effect of external capital inflows on economic growth in receiving countries is evaluated. This study is amongst the first to investigate the interconnected effects of FDI, ODA, and remittances upon output for PICs. In line with the new growth theory, it is argued that the stock of human capital influences the effectiveness of capital inflow on economic growth. This study therefore incorporates human capital and finds that FDI is more effective in stimulating economic growth when levels of human capital are higher, allowing technological spillover effects to be easier absorbed. Remittances appear more effective in fostering economic growth when levels of human capital are lower. ODA seems to have only a slightly positive impact on economic growth, independent from levels of human capital.