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