Foreign direct investment and business cycle co-movements: The panel data evidence

Chih-Chiang Hsu, Jyun-Yi Wu () and Ruey Yau

Journal of Macroeconomics, 2011, vol. 33, issue 4, 770-783

Abstract: The previous literature has largely overlooked the possible channels through which foreign direct investment (FDI) might influence business cycle synchronization. In this study we analyze the linkages that exist among FDI, trade and industrial dissimilarity in relation to business cycle co-movements using a panel data set taken from 77 pairs of developed countries. The error component three-stage least squares (EC3SLS) estimates from a simultaneous equations model with panel data are shown to be superior to the estimates obtained from single equation models or simultaneous equations models with cross-sectional data. Our results indicate that FDI serves as a channel of international business cycle transmission that is equally important as the channels of trade and monetary policy. On the contrary, industrial dissimilarity is identified as having an indirect impact on the business cycle correlation through trade and FDI. Furthermore, our findings suggest that in our sample FDI is of the horizontal type and tends to substitute for trade.

Keywords: Business cycle co-movements; Foreign direct investment; Trade; Industrial dissimilarity (search for similar items in EconPapers)
JEL-codes: E32 F10 F21 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:33:y:2011:i:4:p:770-783

DOI: 10.1016/j.jmacro.2011.06.001

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