Economics Department Working Paper Series
Working Paper Number
2005-03
Publication Date
2005
Abstract
Many developing countries have adopted investor-friendly policies in recent years in order to attract export-oriented foreign direct investment (FDI). The effects of these policies on the external accounts have been largely ignored. This paper endogenizes FDI inflows in a structuralist general equilibrium framework to contribute towards filling this gap. Our economy consists of: (i) a non-tradable goods sector and (ii) an export processing zone (EPZ) that hosts transnational corporations. The analysis finds that, contrary to widely-shared perceptions, the short-run effects of FDI-friendly policies on the balance of payments may frequently be negative due to the nature of both the investments and the policy measures. Moreover, balance of payments-related consequences of measures such as tax concessions and wage controls differ depending on: (i) which sector these are implemented in, (ii) the nature of international demand, and (iii) the extent of backward linkages between the EPZ and the domestic economy.
DOI
https://doi.org/10.7275/1069178
Recommended Citation
Razmi, Arslan, "The Effects of Export-Oriented, FDI-Friendly Policies on the Balance of Payments in a Developing Economy: A General Equilibrium Investigation" (2005). Economics Department Working Paper Series. 66.
https://doi.org/10.7275/1069178