The Relation between Trade and FDI in Developing Countries -- A Panel Data Approach
AbstractUsing panel data for the period 1970-97, I examine the relation between a developing country's trade openness and the stock of its FDI liabilities. The paper makes two contributions. First, I find that trade openness is positively correlated with FDI liabilities, with or without country fixed effects. Moreover, this correlation remains robust to the inclusion of additional variables on the right hand side, such as GDP per capita, inflation, institutional quality, macroeconomic volatility and measures of capital controls. Secondly, I show that the source of this correlation is causality from FDI to trade openness, rather than the other way around. To establish this, I run IV regressions first with FDI as the dependent variable, and trade liberalization dates instrumenting for trade openness, and then with trade openness as the dependent variable, and bilateral investment treaties signed by countries instrumenting for FDI. I find that trade liberalization increases trade openness, but predicted trade openness has no explanatory power for FDI liabilities. On the other hand, the number of bilateral investment treaties signed by a country significantly increases its stock of FDI liabilities, and the predicted stock of FDI liabilities has significant explanatory power for trade openness. This is an important finding because the standard approach so far in the literature has been to include trade openness on the right hand side of regressions (with the left hand side involving some measure of FDI liabilities), thereby implicitly assigning to it a causal role. My paper shows that this practice introduces endogeneity bias in the regression coefficients.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by De Gruyter in its journal Global Economy Journal.
Volume (Year): 7 (2007)
Issue (Month): 3 (October)
Contact details of provider:
Web page: http://www.degruyter.com
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Tolentino, Paz Estrella, 2008. "The determinants of the outward foreign direct investment of China and India: Whither the home country?," MERIT Working Papers 049, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
- Tolentino, Paz Estrella, 2010. "Home country macroeconomic factors and outward FDI of China and India," Journal of International Management, Elsevier, vol. 16(2), pages 102-120, June.
- Dinuk Jayasuriya, 2011. "Improvements in the World Bank's Ease of Doing Business Rankings: Do they translate into greater foreign direct investment inflows?," Development Policy Centre Discussion Papers 1108, Development Policy Centre, Crawford School of Public Policy, The Australian National University.
- Mulugeta Kahsai & Yohannes Hailu & Chali Nondo & Peter Schaeffer, 2011. "The Role of Institutional Quality in FDI Inflows in Sub-Saharan Africa," Working Papers 201103, Regional Research Institute, West Virginia University.
- Jayasuriya, Dinuk, 2011. "Improvements in the World Bank's ease of doing business rankings : do they translate into greater foreign direct investment inflows ?," Policy Research Working Paper Series 5787, The World Bank.
- Chowdhury, Mamta B, 2011. "India’s Outward Foreign Direct Investment: Closed Doors to Open Souk," MPRA Paper 32828, University Library of Munich, Germany.
- Masron, Tajul Ariffin, 2013. "Promoting intra-ASEAN FDI: The role of AFTA and AIA," Economic Modelling, Elsevier, vol. 31(C), pages 43-48.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.