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3 - Does Foreign Direct Investment Provide More Balance-of-Payments Financing?

Published online by Cambridge University Press:  21 October 2015

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Summary

AS THE GLOBAL SUPPLY of capital has dwindled, some have seen FDI as a potential additional source of finance for the balance of payments. Using Meade's (1951) distinction between autonomous and accommodating capital flows, Turner (1991, pp. 9195) addresses the question of whether or not net FDI inflows are accommodating and hence constitute additional financing for the balance of payments by regressing components of the capital account on the current account financing requirement (both in first differences) for some countries of the Organisation for Economic Co-operation and Development (OECD). The estimated equation takes the form:

ΔKFi = α0 + α1ΔKFR,

where ΔKFi is the year-on-year change in the net capital flow item expressed as a percentage of GNP and ΔKFR is the year-onyear change in the current account minus the official settlements balance also expressed as a percentage of GNP (both in current prices).

Turner (1991, table 33, p. 92) finds that short-term bank flows are significantly correlated with the current account financing requirement with coefficients ranging from 0.27 (United Kingdom) to 0.88 (Canada) for seven of the ten OECD countries. In the case of FDI, however, Turner concludes that this flow is much closer to being autonomous than accommodating; the coefficient is significant only in the case of France with a value of only 0.13. Turner ranks long-term bank lending as the most autonomous, FDI next, portfolio investment third, and short-term bank loans as the most accommodative type of capital flow; Turner's results are reproduced here in Table 2. Only coefficients with t statistics of 1.5 and over are reported.

Using Turner's methodology with data on net capital flows from International Financial Statistics CD-ROM for a sample of sixteen developing countries, I find a rather different response pattern, as shown in Table 3. In contrast to the OECD countries, other long-term capital flows appear to be just as sensitive to current account financing requirements as short-term flows in this sample of developing countries.

Type
Chapter
Information
Foreign Direct Investment in Southeast Asia
Differential Impacts
, pp. 10 - 14
Publisher: ISEAS–Yusof Ishak Institute
Print publication year: 1993

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