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Implications of FDI for Current Account Balance: A Panel Causality Analysis

Author

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  • Serap Bedir

    (Erzurum Technical University, Turkey)

  • Aylin Soydan

    (Okan University, Turkey)

Abstract

Two main forms of capital movements, namely portfolio and direct investments, towards developing countries have been studied from various angles. It is very often argued that direct investments have better implications for economic development and growth as they provide more stable and long-term resources. Foreign direct investment is also regarded to be a healthier means for financing current account deficits. However, widening current account deficits in most of the developing economies in the past few decades have brought about the question of implications of capital movements, including FDI, for those imbalances. This paper empirically investigates the relationship between current account balances and FDI in a group of developing economies by considering the channels for this relationship. To provide an empirical analysis, a panel Granger causality framework is employed with the data on FDI, exports and imports, by using the methodology developed by Konya (2006). The empirical results of the study do not provide conclusive results; the countries in the panel seem to have various links between FDI and international trade components.

Suggested Citation

  • Serap Bedir & Aylin Soydan, 2016. "Implications of FDI for Current Account Balance: A Panel Causality Analysis," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 4(2), pages 58-71.
    • Handle: RePEc:ejn:ejefjr:v:4:y:2016:i:2:p:58-71
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