The European Journal of Comparative Economics
ISSN: 1824-2979
Year: 2014, June. Volume: 11 - Issue: 1

FDI inflows and trade imbalances: evidence from developing Asia

Thi Anh-Dao Tran ; Thi Thanh Binh Dinh

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Start page: 147 - End page: 169

FDI, export-led growth, trade imbalance, developing Asia
The present paper examines the effects of FDI inflows on external imbalances in the developing and transition countries in Asia during the period 1991-2011. To this end, we extend the conventional trade balance model by reformulating the determinants of exports and imports. Our empirical findings suggest that current FDI inflows increase trade deficits, leading to negative consequences for the host country’s macroeconomic stability. However, the coefficient estimated becomes negative when we lag the FDI variable, implying that FDI inflows worsen the trade balance first and then improve it. We also find that a real depreciation tends to worsen trade balances because the usual Marshall-Lerner constraint is magnified by the import content of exports. Lastly, higher domestic absorption and larger productive capacity in the manufacturing sector improve the trade balance. Thelatter result supports the export-investment nexus, one of the most distinctive features of Asia.

Jel code: F14
Jel code: F21
Jel code: F41
Jel code: O19
Jel code: O53
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