Sectoral Composition of Foreign Direct Investment and External Vulnerability

25  October 2010    2:00 pm

Yuko Kinoshita, IMF

In cooperation with:
Research Centre International Economics (FIW) 


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


In the process of catching up to the EU income levels, emerging European economies built up external imbalances and attracted large capital inflows prior to the global financial crisis. Many attribute the severity of the crisis to excessive capital inflows. This paper examines the effect of structural distribution of FDI on external vulnerability – trade account balance in particular – to see if a concentration in FDI in nontradables leads to large external imbalance as is often perceived. Our study finds that this is indeed the case: trade account deficit is reduced by 0.1-0.2 per cent of GDP when a share of tradable FDI to total FDI increases by 1 per cent. We also study what determines the pattern of sectoral distribution of FDI across countries, and draw policy implications for more stable and sustainable growth strategy.

Keywords: foreign direct investment, Emerging Europe, external vulnerabilities

JEL classification: F21, F14, O52