THE IMPACT OF FOREIGN DIRECT INVESTMENT ON CURRENT ACCOUNT BALANCE: EMPIRICAL EVIDENCE FROM DEVELOPING ASIAN ECONOMIES

Abstract

Foreign Direct Investment is considered as a desirable source of capital inflows for developing economies. Developing Asia has become the world’s largest host for FDI and received about half of the global FDI inflows (WIR, 2021). Most of the vacant literature on FDI has highlighted its positive contribution towards host economy, however the present study identified the negative bearing of inward FDI on current account balance of the host economy. The present study has used the date for developing Asia from 1980 to 2020 on the study variables and ARDL approach to cointegration is employed to identify the long run relationship between study variables. The data is obtained from the database of United Nations Conference on Trade and Development (UNCTAD). Current account deficit is taken as dependent variable. For explanatory variables, log form of inward FDI, log of GDP and log of Trade Openness (TO) are used. Based on the empirical investigation it is concluded that inward FDI can increase the current account deficit of FDI host economies. As policy suggestion it can be suggested that for developing Asia inward FDI should be sector specific that can upsurge the exports of the country instead increasing the imports of the recipient economy.

Key Words: FDI, Current Account Balance, Developing Asia, ARDL.

JEL Classification Codes: F21, F32, C23