FDI Inflows and Current Account Evidence From BIMSTEC

FDI Inflows and Current Account Evidence From BIMSTEC

Nida Rahman (Aligarh Muslim University, India) and Shehroz Alam Rizvi (Aligarh Muslim University, India)
DOI: 10.4018/978-1-5225-3026-8.ch007
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Abstract

The liberalisation drive that swept across the globe post-1990s gave way to FDI in emerging as a catalyst of economic development for a majority of economic groups and nations. With the objective of realising economic development by transiting from debt flows to FDI flows, several economies tied up in regional groups in the Asian region to foster trade and investment sectors and other areas as well. In this regard, the BIMSTEC group came forth in 1997 as an initiative on the part of selected South Asian and South East Asian countries to collaborate and work together for the economic wellbeing of the member countries. The current account balance of the member nations and its nexus with inward FDI needs to be counted while forging over economic soundness of the participating nations. In this respect, the chapter attempts to search for evidences of causality among FDI inflows and current account balance across member countries of BIMSTEC group. The chapter utilises annual data for the member countries for a time frame ranging 1991-2014 from UNCTAD STATISTICS Database.
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Introduction

Foreign Direct Investment, since times immemorial has been counted upon as an instant means to accentuate economic growth by nations. However, it was after some crises in the financial scenario of world economy as a whole and individual nations in specific that Foreign Direct Investment Inflows appeared as a counteractive force to economies in regard to debugging the inappropriate repercussions of financial crises on the economic position of nations. Globalisation has added much to imparting Foreign Direct Investment Inflows this prominent status of acting as an agent of growth and economic fortune though the aftereffects showed a variation as per the nature of economies that became home to these flows. It was majorly the period post liberalisation that witnessed a boom in Foreign Direct Investment flows. In 1997, Direct Foreign Investment accounted for about half of all private capital (Aitken & Harrison, 1999). The underlying reason for this upturn was the extensive liberal reforms and incentives adopted by countries in order to let loose their economy in hands of foreign players to invest. For many South Asian countries, the liberalisation process arrived sooner than other economies of the region. For instance, Sri Lanka liberalised its economic reforms way back in 1977 when many other developing countries were strongly enclosed in narrow minded and conservative reforms.

With growing need to integrate to a wider extent into the world economy, countries chiefly the developing ones engaged in liberalising FDI regimes to an ever-increasing degree. However, little was thought about its spill over effects on the macro-economic indicators. Foreign Direct Investment is not always about good fortune and miracles when it comes to macro-economic condition of the host nations. Being a mixed blessing, Foreign Direct Investment flows many a times debilitate the economy hosting these by splashing out even the good prospects the economy is endowed with. One such problem is that of Current Account Deficits that appears to be a critical issue in the present-day world order especially in context of Developing countries. Developing countries normally ran current account deficit problems and the surge in international capital flows to developing countries have coincided with widening current account deficits in many of these countries (Calvo et al., 1996). In 1997, the FDI figures counted for 40 per cent of total capital flows to developing countries (Aitken & Harrison, 1999). With huge figures of Foreign Direct Investment Inflows pooling in host economies especially the developing world economies, the negating effects are acknowledged to be widening as against the positive effects. Foreign Direct Investment, being a component of Capital Account of the Balance of Payments has an effect on overall Balance of Payments as also specifically on Current Account of the BOP.

Asian Continent, well acknowledged as a hub of trade activities and foreign exchange in todays full-fledged globalized world has an endless listicle of economies under its umbrella that have acclimatized way too well with the globalisation drive and has stepped ahead in luring investors to pour in funds in their economies. This attitude of Asian economies is apparent in the liberal trade and investment policies forged ahead by them. Not only individual economies, but in the backdrop of Asian financial crisis of 90s a multitude of regional groups emerged coalescing in order to achieve collective goals. Many such regional groups and sub- regional groups have appeared as an avenue to ameliorate economic cooperation and work as a single entity to enrich the member nations by mutually assisting in meeting objectives. In line with this object of Asian economies to do away with policies that are suspicious of leading them to yet another market and financial failure such as that of the financial crisis of 1997, economies have started tying up with other nations in the continent to mutually succeed in trade and foreign investment activities. Expansion of foreign trade, direct investment and financial flows has created a naturally integrated economic zone in East Asia (Kawai, 2005).

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