Foreign capital crowds-out domestic savings in developing countries

Savings in Ghana like most developing countries is very low. This poses problem to investment and economic growth due to lack of capital formation. The trend has been to use foreign capital as source of development. This work tries to examine the contribution of foreign capital on the Ghanaian economy. Precisely it examines the effects of the individual components of foreign capital - foreign aids and grants foreign direct investment and foreign commercial borrowing- on domestic savings in Ghana and by extension other countries. More precisely to investigate the crowding-out debate of foreign capital on domestic savings in developing countries. The investigation set out in the error correction mechanism concludes that there is positive and significant effect of foreign capital on domestic savings rejecting the crowding out hypothesis in the long run but no significant effect on domestic savings in the short run. The result would awaken policy makers banks and financial analysts to come out with policies that will attract the inflow of long term foreign capital relative to short term capital.