Foreign Direct Investment and Growth Convergence in a North-South Framework

Vinicius Cicero and Gilberto Lima

No 2020_04, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: This paper develops a general extended version of the balance-of-payments constrained growth model that takes into consideration some often ignored aspects of growth in open economies - namely, the importance of capital flows in the long run, terms of trade changes and trade and payments interdependence among regions. Furthermore, this paper incorporates Thirlwall's analysis into a North-South model that takes into account four intrinsically connected channels through which FDI inflows can affect the productive structure of Southern region - capital accumulation, balance-of-payments components, technological change and income distribution - finding that it still explains uneven development, although reducing the distance between regions by easing the external restriction, that is indicate a more even development path. In addition, this article presents an empirical exercise that, although not conclusive when considering the income elasticities of import ratio, points to a quite relevant result: the non-consideration of income distribution effects in the import functions represents not only the omission of a relevant variable on econometric estimations but, mainly, the omission of an important theoretical channel to understand growth in open economies.

Keywords: Foreign direct investment; Economic growth; Uneven development; North-South relations; Balance-of-Payments constraint; Functional distribution of income (search for similar items in EconPapers)
JEL-codes: E12 F14 F21 O11 (search for similar items in EconPapers)
Date: 2020-06-18, Revised 2020-06-18
New Economics Papers: this item is included in nep-fdg, nep-gro, nep-int and nep-mac
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