Do Capital Flows Cause (De)-Industrialization?

Fatma Tasdemir ()
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Fatma Tasdemir: Sinop University

No 1693, Working Papers from Economic Research Forum

Abstract: This paper aims to investigate the effect of capital flows on manufacturing in advanced (ADV), emerging market and developing (EMDE) and Middle East and North Africa (MENA) economies during the 1990-2020 period. Our empirical results suggest that capital flows lead to de-industrialization in all country groupings. Accordingly, capital flows tend to allocate the resources out of manufacturing. Considering the heterogeneity in technology intensity levels, we disaggregate manufacturing into low-tech and medium-high-tech industries. We find that de-industrialization appears to be the case for medium-high-tech manufacturing in the samples of ADV and EMDE, while in MENA, it is observed in low-tech manufacturing. On the other hand, capital flows encourage low-tech manufacturing in EMDE, which may suggest a shift of resources from medium-high-tech to low-tech manufacturing industries. Based on these results, policy makers may consider that financing manufacturing investment with capital flows is possible but could be risky.

Pages: 23
Date: 2023-12-20, Revised 2023-12-20
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