'Addressing the Best Enemy': The Impact of Foreign Direct Investment on Developing Countries’ Terms of Trade

07  October 2010    4:00 pm

Konstantin Wacker, University of Göttingen

In cooperation with:
Research Centre International Economics (FIW) 


wiiw, Rahlgasse 3, 1060 Vienna, lecture hall (entrance from the ground floor)


This paper first shows that important contributions concerning the Prebisch-Singer hypothesis of falling terms of trade for developing countries have implicitly relied on the role of multinationals and foreign direct investment. As of yet, this relationship has not been empirically investigated. To do so, data on 111 developing countries between 1980 and 2008 is analyzed using panel data methods. It is shown empirically that there is no reason to believe, multinationals’ activities were responsible for a possible decrease of the developing countries’ net barter terms of trade. On the contrary, foreign direct investment seems to play a positive role in this context for at least a group of developing countries. Another contribution of the paper is to investigate other possible variables structurally influencing terms of trade.

Keywords: terms of trade, FDI, multinationals, Prebisch Singer Hypothesis

JEL classification: C23, F23, O11