Foreign equity, which is the net purchase of equity by foreign residents, is an order of magnitude higher, even as a percentage of GDP, in OECD countries than in non-OECD countries. This presents a version of the Lucas puzzle since OECD countries grow on average smaller than non-OECD countries. Why doesn’t capital flow from rich to poor countries? We investigate the relationship between foreign equity and GDP growth using a panel dataset covering 56 countries from 1985 to 2017. We find that foreign equity increases GDP growth through private investment growth in the whole sample and private investment and TFP growth in OECD countries and in countries that are closer to technological frontier. We use the interaction between regional foreign equity and the stock market capitalization as an instrumental variable to build a case that the relationship from foreign equity to GDP growth is causal in nature. Local projection analysis shows that the impact of foreign equity on private investment peaks in two-three years before it fades out, and that foreign equity increases the deviation from GDP growth trend and not the trend. The findings indicate that the investment by foreign residents in equity has a signaling effect that attracts investment from other investors and contributes to physical capital accumulation due to high marginal product of capital in non-OECD countries and intangible capital accumulation due external economies of scale in OECD countries.