Three essays on FDI and uneven development

Author(s)

Vinícius Curti Cicero

• Document type: Master's Dissertation
• Press: São Paulo.
• Institution: Universidade de São Paulo (USP). Faculdade de Economia, Administração e Contabilidade (FEA/SBD)
• Defense date: 2020-08-07

Examining board members

Gilberto Tadeu Lima; Carolina Troncoso Baltar; Fernando Balbino Botelho; Rafael Saulo Marques Ribeiro

• Advisor: Gilberto Tadeu Lima

Abstract

This thesis aims to a better understanding of the mechanisms underlying the effects observed from the inflow of Foreign Direct Investment (FDI) into developing economies. With a central focus on issues related to the long-run relative development trajectories between structurally distinct regions - the developed North and the less developed South - we also explore the relationships between the functional distribution of income and the commercial and capital flows, seeking to understand possible mechanisms to overcome unequal development trajectories between rich and poor countries. The first essay of this thesis incorporates Thirlwall\'s analysis into a North-South model that takes into consideration some often ignored aspects of growth in open economies - namely, the importance of capital flows in the long run, terms of trade changes and trade and payments interdependence among regions. Considering five intrinsically connected channels through which FDI inflows can affect the productive structure of Southern region, we find that the effects of these capital flows might reduce the distance between regions by alleviating the external constraint and, depending on the magnitude of some effects, might even indicate a reversion of the uneven development pattern. In the second essay, we present an empirical exercise that provides robust empirical evidence that variations of the wage share have a negative impact on the volume of imports of developing countries. When indicating the importance of the functional distribution of income for the determination of imports, we point out not only the omission of a relevant variable in much of the empirical literature that estimates this trade flows, but also the omission of a relevant channel in the discussions of real exchange rate undervaluation and its impacts, external constraint and economic growth. Besides, we examine two empirical questions related to the first essay of this thesis. Finally, the third essay presents a case study for the Brazilian economy and our main results point to a positive relationship between FDI flows and Brazilian economic activity in the short term, as well as a positive relationship between FDI flows, aggregate productivity and GDP growth rate in the long run. Despite these positive effects, an important caveat appears in our analysis: when we consider the effects of such capital flows on income distribution, we find evidence of a certain trade-off between promoting economic growth related to FDI flows and increases in income inequality. Furthermore, we suggest that the connection between FDI and trade balance indicates a tightening of the external constraint in the long run. (AU)

• FAPESP's process: 18/19267-0 - Foreign Direct Investment in developing economies: mechanisms and effects on uneven development
• Grantee: Vinicius Curti Cícero
• Support Opportunities: Scholarships in Brazil - Master