FDI and exports in developing countries: Theory and evidence

Abstract

This study analyses the relationship between FDI and Exports, as well their common determinants in developing countries, using a panel of 49 countries over the period 1970-2004. The analysis shows that both exports and FDI positively affect each other, though the effect of exports on FDI is not very significant. Thus, there is no evidence of a substitution relationship between FDI and exports. The analysis shows that GDP, economic growth, domestic absorption, and exports positively affect FDI, a result consistent with market-seeking behaviour of multinational corporations. On the other hand, external debt and BOP deficit have negative effects on FDI. The effect of domestic investment in explaining FDI flow is negative. The study also shows that the lack of fiscal incentives is a hurdle for FDI. It is also found that depreciation of real exchange and industrialisation and development of communication facilities significantly promote exports. © The Pakistan Development Review.