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The "Addiction" with FDI and Current Account Balance

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  • Joze Mencinger

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Abstract

The EU new member states (NMS) have been recipients of substantial net capital inflows in the form of FDI. Economic policy makers and development strategists often regard them as the pillar of the development and neglect their potential long run consequences: inevitable deficit in the investment balance. FDI however affects current account balance also indirectly by improving or deteriorating trade balance which might overweigh negative direct effects, moderate them, or add to the deterioration of the current account balance. Capital outflows through the investment account in NMS have been increasing rapidly . Namely, the rates of return on FDI are twice the rates of return on portfolio investments and three times the rates of return on loans. Indirect effects have moderated strong direct effects but could not overweigh structural current account deficit caused by transition. A major problem might arise as a consequence of the “addiction” with FDI. First, the outflows of capital speeded up by the opportunities of multinationals to reallocate production to the countries with even cheaper labor might become larger than new inflows. Second, sudden interruption of FDI inflows could result in an exchange rate crisis.

Suggested Citation

  • Joze Mencinger, 2008. "The "Addiction" with FDI and Current Account Balance," ICER Working Papers 16-2008, ICER - International Centre for Economic Research.
  • Handle: RePEc:icr:wpicer:16-2008
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    File URL: http://www.biblioecon.unito.it/biblioservizi/RePEc/icr/wp2008/ICERwp16-08.pdf
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Jože Mencinger
      by noreply@blogger.com (SlaviÅ¡a Tasić) in Tržišno rešenje on 2012-04-23 23:19:00

    Citations

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    Cited by:

    1. Melisa Chanegriha & Chris Stewart & Christopher Tsoukis, 2017. "Identifying the robust economic, geographical and political determinants of FDI: an Extreme Bounds Analysis," Empirical Economics, Springer, vol. 52(2), pages 759-776, March.
    2. Nathalia Rios Ballesteros & Thomas Goda, 2017. "Natural resource-seeking FDI inflows and current account deficits in commodity-producing developing economies," DOCUMENTOS DE TRABAJO CIEF 015298, UNIVERSIDAD EAFIT.
    3. Srđan Boljanović, 2012. "A Sustainability Analysis Of Serbia’S Current Account Deficit," Economic Annals, Faculty of Economics, University of Belgrade, vol. 57(195), pages 139-172, October -.
    4. A. Yasemin Yalta, 2012. "Uncovering the channels through which FDI affects current account: the case of Turkey," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 5(2), pages 158-167.
    5. B. Bayraktar-Saglam & A.Y. Yalta, 2015. "Current Account Imbalances and Capital Flows," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 7(2), pages 201-213, May.
    6. Serap Bedir & Aylin Soydan, 2016. "Implications of FDI for Current Account Balance: A Panel Causality Analysis," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 4(2), pages 58-71.
    7. Jaydeep Mukherjee & Debashis Chakraborty & Tanaya Sinha, 2013. "How has FDI influenced Current Account Balance In India? Time Series Results in presence of Endogenous Structural Breaks," Working Papers 1317, Indian Institute of Foreign Trade.

    More about this item

    Keywords

    current account; factors services; foreign direct investments;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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