FDI inflows and trade imbalances: evidence from developing Asia

Thi Anh-Dao Tran and Thi Thanh Binh Dinh

European Journal of Comparative Economics, 2014, vol. 11, issue 1, 147-169

Abstract: 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.

Keywords: FDI; export-led growth; trade imbalance; developing Asia (search for similar items in EconPapers)
JEL-codes: F14 F21 F41 O19 O53 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:liu:liucej:v:11:y:2014:i:1:p:147-169

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