6 - Conclusion

Summary

BY ANALYSING FDI IN A macroeconomic framework, this study throws new light on various channels through which FDI can influence saving, investment, growth, and the balance of payments on current account. The first finding is that in a sample of sixteen developing countries, FDI does not provide additional balance-of payments financing for a pre-existing current account deficit. In the eleven developing countries constituting a control group, FDI is associated with reduced domestic investment, so implying that FDI to these countries is simply a close substitute for other capital inflows. For five Southeast Asian developing market economies, however, FDI raises domestic investment by the full extent of the FDI inflow. In these countries, therefore, FDI has not been used as a substitute for other types of capital inflows but has increased capital formation and so worsened the current account.

In examining some secondary effects, I find that FDI has a significantly negative impact on national saving in this sample of developing countries. For the control group, this negative effect is of similar magnitude to the negative effect of FDI on domestic investment, implying a zero effect on the current account. However, the negative effect of FDI on national saving in the five Southeast Asian developing market economies indicates that FDI could have a negative effect on the current account in excess of its negative effect through increased domestic investment.

I also find distinctive differences in the effects of FDI on economic growth in the control group and the Southeast Asian developing market economies. While FDI has a negative effect on growth in the first country group, it has the same positive effect on growth as domestically financed investment in the latter country group.

Finally, for the complete sample of sixteen developing countries, I show that FDI raises the rate of economic growth in the absence of financial repression and trade distortions.