Foreign direct investment, other capital flows, and current account deficits : what causes what?
AbstractThis paper is part of a larger effort to study the determinants and impact of foreign direct investment. The authors examine flows of foreign direct investment to 46 developing countries to test whether such flows are autonomous or accommodating vis-a-vis the current account and other capital flows. Using Granger-casualty tests, they find that: 1) requirements to surrender exports proceeds to the monetary authorities and the existence of special exchange rates for some capital account transactions reduce the probability that foreign direct investment is independent; 2) the more liberal a country's foreign exchange system, the more foreign direct investment is likely to be independent or exogenous; and 3) foreign direct investment is associated with a larger increase in capital formation when it is independent than when it is Granger-caused by other capital flows.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 1527.
Date of creation: 31 Oct 1995
Date of revision:
Capital Markets and Capital Flows; Fiscal&Monetary Policy; Economic Theory&Research; Payment Systems&Infrastructure; International Terrorism&Counterterrorism; Economic Theory&Research; Macroeconomic Management; Banks&Banking Reform; Financial Economics; International Terrorism&Counterterrorism;
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