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FDI and Macroeconomic Stability

Author: FanYouDan
Tutor: LiuEnZhuan
School: Tianjin University of Finance and Economics
Course: International Trade
Keywords: FDI Macroeconomic Stability Threshold effect Dynamic panel Model
CLC: F830.59;F113
Type: Master's thesis
Year: 2009
Downloads: 228
Quote: 0
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Abstract


As stable and long-term capital, foreign direct investment has always been gaining all kinds of countries’popularity. In particular, for developing countries, due to their feeble economic foundation, the demand of attracting inward FDI has become more insistent. However, as FDI keeps gushing into the developing countries, to a certain degree it has an impact on macroeconomic stability of developing countries. Meanwhile, the world economy and countries’macroeconomic environment at present are facing the complicated and ever-changing. Under these conditions of macroeconomic volatility, whether developing countries could maintain the stability of FDI deserves the greatest attention. From a new perspective-semiotics, combining foreign direct investment with macroeconomic stability, this paper discusses the impact of large inflows of FDI on developing countries, and the impact of macroeconomic instability on the relation between FDI and economic growth.In order to access empirically this relation in developing countries, we use a dynamic panel procedure with observations per country over the period 1980-2007.To improve efficiency; we use the standard“difference”and“system”GMM and 2SLS estimators. Our findings show that there is no independent impact of FDI on economic growth. The growth-effect of FDI does not also depend on TOT, current account balance and income per capita. But, the positive impact of FDI on economic growth depends on macroeconomic stability, especially inflation rate: there is a threshold effect of annual percentage change of consumer prices.One of the most important enlightenments we can get from this paper is that, to reach the goal for introducing the FDI to develop the economy, developing countries need a stable economy circumstance and robust policy system. Only the enforcement of incentive mechanism to introduce the FDI is not sufficient. Regarding the absorption of FDI as a studying procedure may pay a cost to endanger the macro economy stability. So with the increase of the crisis channels in world economy, developing countries should make positive measures to prevent from the instability of macro economy due to the enormous and persistent inwards FDI.

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