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Business-Cycle Asymmetry and Causality Between Foreign Direct Investment and Fixed Capital Formation

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  • Kuan-Min Wang

    () (Department of Finance, Overseas Chinese University, Taiwan)

  • Yuan-Ming Lee

    (Department of Finance, Southern Taiwan University, Taiwan)

  • Thanh-Binh Nguyen Thi

Abstract

This study creates the threshold vector autoregression model and employs quarterly data of Taiwan from 1981 to 2006 to examine the relationship between foreign direct investment (FDI) and domestic gross direct investment (GDI). Our framework provides a consideration of business cycle asymmetry that quite differs from the existing approach. We find that (1) the long-run relationship between FDI and GDI is complementary; (2) the relationship between FDI and GDI is substitutive during expansion, however, is complementary during recession; (3) a depreciation of the Taiwanese Dollar helps attract FDI during expansion, but decrease GDI during recession; (4) the negative impact of Taiwan's outward foreign direct investment and national saving on GDI, the negative impact of GDP on GDI and the negative impact of Taiwan's outward investment on FDI are only evident during recession; and (5) macroeconomic variables indirectly affect FDI during expansion and GDI during recession through the adjusting process toward equilibrium.

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Bibliographic Info

Article provided by Academy of Economic Studies - Bucharest, Romania in its journal The AMFITEATRU ECONOMIC journal.

Volume (Year): 11 (2009)
Issue (Month): Number Special 3 (November)
Pages: 698-721

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Handle: RePEc:aes:amfeco:v:11:y:2009:i:number_special_3:p:698-721

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Keywords: foreign direct investment; gross direct investment; current depth of recession; Threshold model;

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  1. Kozo Kiyota & Shujiro Urata, 2004. "Exchange Rate, Exchange Rate Volatility and Foreign Direct Investment," The World Economy, Wiley Blackwell, vol. 27(10), pages 1501-1536, November.
  2. Jong Il Choe, 2003. "Do Foreign Direct Investment and Gross Domestic Investment Promote Economic Growth?," Review of Development Economics, Wiley Blackwell, vol. 7(1), pages 44-57, February.
  3. Razin, A & Sadka, E & Yuen, C-W, 1997. "A Pecking Order of Capital Inflows and International Tax Principles," Papers 12-97, Tel Aviv - the Sackler Institute of Economic Studies.
  4. Martin Feldstein, 1994. "The Effects of Outbound Foreign Direct Investment on the Domestic Capital Stock," NBER Working Papers 4668, National Bureau of Economic Research, Inc.
  5. Kenneth A. Froot & Jeremy C. Stein, 1992. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," NBER Working Papers 2914, National Bureau of Economic Research, Inc.
  6. Ang, James B., 2008. "Determinants of foreign direct investment in Malaysia," Journal of Policy Modeling, Elsevier, vol. 30(1), pages 185-189.
  7. Pelagidis, Theodore & Mastroyiannis, Tasos, 2003. "The saving-investment correlation in Greece, 1960-1997: implications for capital mobility," Journal of Policy Modeling, Elsevier, vol. 25(6-7), pages 609-616, September.
  8. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
  9. W. J. Jansen, 1996. "The Feldstein-Horioka Test of International Capital Mobility: Is It Feasible?," IMF Working Papers 96/100, International Monetary Fund.
  10. Choi, Jongmoo Jay & Jeon, Bang Nam, 2007. "Financial factors in foreign direct investments: A dynamic analysis of international data," Research in International Business and Finance, Elsevier, vol. 21(1), pages 1-18, January.
  11. Dewenter, Kathryn L, 1995. "Do Exchange Rate Changes Drive Foreign Direct Investment?," The Journal of Business, University of Chicago Press, vol. 68(3), pages 405-33, July.
  12. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, July.
  13. Corbin, Annie, 2001. "Country specific effect in the Feldstein-Horioka paradox: a panel data analysis," Economics Letters, Elsevier, vol. 72(3), pages 297-302, September.
  14. Chakrabarti, Avik, 2006. "The saving-investment relationship revisited: New evidence from multivariate heterogeneous panel cointegration analyses," Journal of Comparative Economics, Elsevier, vol. 34(2), pages 402-419, June.
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