Foreign Direct Investment and Current Account Balance: The Case of South Asian Economies

Abstract

The current account balance plays a significant role in determining macroeconomic stability in the country. It is the relentless phenomenon in South Asian Economies as they are facing persistent current account deficit from a couple of decades. On average they are having a current account deficit of 5.4% of their GDP during 2000-2015. On the other hand, South Asian economies are a potential recipient of foreign direct investment (FDI) as their FDI to GDP ratio has been reached to 13.3% in 2016 from 2.4% in 1995. The focus of the current study is to probe whether FDI has any contribution to correct or deteriorate the current account balance (CAB) of the recipient economy? For the purpose panel of South Asian countries is empirically investigated from 2000 to 2017. Arellano–Bond dynamic estimators are used to determine the empirical relationship. It is found that FDI contributed for reducing the current account deficit in South Asian economies. Furthermore, FDI has a positive impact on exports and the imports of the FDI recipient countries, but the elasticity of exports with respect to FDI is greater than the elasticity of imports. Results demonstrated that FDI inflows could improve the country's current account by increasing its exports. Countries may have benefit by attracting more FDI inflows.