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Oxford Economic Papers Advance Access published online on April 14, 2008
Oxford Economic Papers, doi:10.1093/oep/gpn012
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© Oxford University Press 2008 All rights reserved

Does pleasing export-oriented foreign investors help your balance of payments? A general equilibrium analysis

Arslan Razmi

Department of Economics, University of Massachusetts, Amherst, MA 01003; e-mail: arazmi{at}econs.umass.edu


  Abstract

Many developing countries have adopted investor-friendly policies in order to attract export-oriented foreign direct investment (FDI). The effects of these policies on the external accounts have largely been ignored. We endogenize 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. We find that most of the commonly pursued policies considered are likely to have a negative impact on the balance of payments due to: (i) income re-distribution towards groups more likely to spend on imported goods, (ii) higher capacity utilization in the (more import-intensive) EPZ, and (iii) the excess supply of non-tradables created, which in turn has an adverse valuation effect via a real internal depreciation. Strong backward linkages, however, may under certain conditions help offset the adverse impact through a favorable valuation effect.

Key Words: JEL classifications: F21 • F23 • F41


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