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Foreign direct investment, other capital flows, and current account deficits : what causes what?

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Author Info

  • Fry, Maxwell J.
  • Claessens,Constantijn A.
  • Burridge, Peter
  • Blanchet, Marie-Christine

Abstract

This 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 Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1527.

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Date of creation: 31 Oct 1995
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Handle: RePEc:wbk:wbrwps:1527

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Related research

Keywords: 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;

References

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  1. Alan S. Blinder & Joseph E. Stiglitz, 1983. "Money, Credit Constraints, and Economic Activity," NBER Working Papers 1084, National Bureau of Economic Research, Inc.
  2. Montiel, Peter J., 1993. "Capital mobility in developing countries : some measurement issues and empirical estimates," Policy Research Working Paper Series 1103, The World Bank.
  3. Cockcroft, Laurence & Riddell, Roger C., 1991. "Foreign direct investment in sub-Saharan Africa," Policy Research Working Paper Series 619, The World Bank.
  4. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1.
  5. Odaki, Mitsuhiro, 1986. "Tests of Granger causality by the selection of the orders of a bivariate autoregressive model," Economics Letters, Elsevier, vol. 22(2-3), pages 223-227.
  6. De Gregorio, Jose & Guidotti, Pablo E., 1995. "Financial development and economic growth," World Development, Elsevier, vol. 23(3), pages 433-448, March.
  7. Fry, Maxwell J., 1980. "Money, interest, inflation and growth in Turkey," Journal of Monetary Economics, Elsevier, vol. 6(4), pages 535-545, October.
  8. Calvo, Guillermo A & Coricelli, Fabrizio, 1992. "Stagflationary Effects of Stabilization Programs in Reforming Socialist Countries: Enterprise-Side and Household-Side Factors," World Bank Economic Review, World Bank Group, vol. 6(1), pages 71-90, January.
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Citations

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Cited by:
  1. A. Yasemin Yalta, 2011. "Uncovering the Channels through which FDI affects current account: The Case of Turkey," Working Papers 1108, TOBB University of Economics and Technology, Department of Economics.
  2. Ho-don Yan & Cheng-lang Yang, 2012. "Are there different linkages of foreign capital inflows and the current account between industrial countries and emerging markets?," Empirical Economics, Springer, vol. 43(1), pages 25-54, August.
  3. Siddiqui, Danish Ahmed & Ahmad, Mohsin Hasnain, 2007. "The Causal Relationship between Foreign Direct Investment and Current Account: An Empirical Investigation for Pakistan Economy," MPRA Paper 19743, University Library of Munich, Germany.
  4. Brahmbhatt, Milan & Srinivasan, T.G. & Murrell, Kim, 1996. "India in the global economy," Policy Research Working Paper Series 1681, The World Bank.
  5. Yan, Ho-don & Yang, Cheng-lang, 2008. "Foreign Capital Inflows and the Current Account Imbalance: Which Causality Direction?," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 23, pages 434-461.
  6. Wei Sun & Lian An, 2011. "Dynamics of floating exchange rate: how important are capital flows relative to macroeconomic fundamentals?," Journal of Economics and Finance, Springer, vol. 35(4), pages 456-472, October.
  7. Sabine Herrmann & Adalbert Winkler, 2009. "Financial markets and the current account: emerging Europe versus emerging Asia," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 145(3), pages 531-550, October.

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