2013•RePEc: Research Papers in EconomicsRequires access

Does Foreign Direct Investment Synchronise Business Cycles? Results from a Panel Approach

Claudia Busl, Marcus Kappler

Open publisher page 5 citations

Abstract

A considerable degree of business cycle synchronization is key to a successful operating currency union. The European Monetary Union as well as many other countries strives to attract foreign direct investment (FDI) because of its reputation as being highly beneficial for the host economy. But stronger FDI linkages may also have a significant impact on business cycles and co-movement of these cycles between countries and therefore create a potential conflict between policies that promote FDI and the conduct of the common monetary policy. In this paper we empirically analyze the FDI channel in more detail revisiting the main determinants of synchronization. Previous studies were mainly interested in the long-run impact employing cross-sectional variation for identification. Their typical identification strategy, however, neglects the strongly time variant nature in the process of globalization in general and of FDI in specific. We extend the literature on the determinants of business cycle synchronization by estimating the impact of the determinants with true panel data and a suitable panel estimator. Results indicate that the trade channel is not as important as cross-section models suggest but that FDI may have the potential to increase co-movement of business cycles.

Open-access reader

About this research paper

What this paper is about

A considerable degree of business cycle synchronization is key to a successful operating currency union. The European Monetary Union as well as many other countries strives to attract foreign direct investment (FDI) because of its reputation as being highly beneficial for the host economy. But stronger FDI linkages may also have a significant impact on business cycles and co-movement of these cycles between countries and therefore create a potential conflict between policies that promote FDI and the conduct of the common monetary policy. In this paper we empirically analyze the FDI channel in more detail revisiting the main determinants of synchronization. Previous studies were mainly interested in the long-run impact employing cross-sectional variation for identification. Their typical identification strategy, however, neglects the strongly time variant nature in the process of globalization in general and of FDI in specific. We extend the literature on the determinants of business cycle synchronization by estimating the impact of the determinants with true panel data and a suitable panel estimator. Results indicate that the trade channel is not as important as cross-section models suggest but that FDI may have the potential to increase co-movement of business cycles.

Why it matters

OpenAlex reports 5 citations for this work. Citation counts describe recorded attention and do not establish research quality.

Key contribution

A contribution statement is not available in the OpenAlex record.

Method / approach

Method details are not available in the OpenAlex metadata.

Main findings

Findings are not separately available in the OpenAlex metadata.

Limitations

Limitations are not available in the OpenAlex metadata.

Applications

Application details are not available in the OpenAlex metadata.

Available abstract

A considerable degree of business cycle synchronization is key to a successful operating currency union. The European Monetary Union as well as many other countries strives to attract foreign direct investment (FDI) because of its reputation as being highly beneficial for the host economy. But stronger FDI linkages may also have a significant impact on business cycles and co-movement of these cycles between countries and therefore create a potential conflict between policies that promote FDI and the conduct of the common monetary policy. In this paper we empirically analyze the FDI channel in more detail revisiting the main determinants of synchronization. Previous studies were mainly interested in the long-run impact employing cross-sectional variation for identification. Their typical identification strategy, however, neglects the strongly time variant nature in the process of globalization in general and of FDI in specific. We extend the literature on the determinants of business cycle synchronization by estimating the impact of the determinants with true panel data and a suitable panel estimator. Results indicate that the trade channel is not as important as cross-section models suggest but that FDI may have the potential to increase co-movement of business cycles.

Key concepts: Foreign direct investment, Panel data, Business, Economics, Econometrics, Macroeconomics

Related papers

Back to paper searchBrowse research topicsOriginal source
Does Foreign Direct Investment Synchronise Business Cycles? Results from a Panel Approach — Research Paper | ScholarLens