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Razmi, Arslan
Year of Publication: 
Series/Report no.: 
Working Paper, University of Massachusetts, Department of Economics 2005-03
Many developing countries have adopted investor-friendly policies in recent years in order to attract export-oriented foreign direct investment (FDI). The effects of these policies on the external accounts have been largely ignored. This paper endogenizes FDI in°ows 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. The analysis finds that, contrary to widely-shared perceptions, the short-run effects of FDI-friendly policies on the balance of payments may frequently be negative due to the nature of both the investments and the policy measures. Moreover, balance of payments-related consequences of measures such as tax concessions and wage controls differ depending on: (i) which sector these are implemented in, (ii) the nature of international demand, and (iii) the extent of backward linkages between the EPZ and the domestic economy. JEL Categories: F21, F23, F41
Foreign direct investment
balance of payments
export processing zones
structuralist macroeconomics
real exchange rates
income redistribution
terms of trade
transnational corporations
Document Type: 
Working Paper

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