Foreign direct investment (FDI) inflows and their impact on Barbados' current account: Implications for substitutes/complements between FDI and exports

Author(s): Campbell, Trevor (2001)

Created 22 Jul, 2001
Categories Working Papers
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Foreign direct investment (FDI) capital inflows have played a significant role in the development of Barbados. These inflows are undertaken by the traded and non-traded sectors. This has implications for the current account and foreign reserves. If FDI is dominated by the former sector, the current account and reserves will be boosted and investment encouraged, but if by the latter sector, the opposite will hold. Thereafter, the long and short-run impact of FDI inflows on the current account is addressed, with annual data spanning thirty years, using regression analysis. The results shows a positive relationship between FDI and the current account in the long-run, suggesting that FDI inflows and exports of Barbados are complements. In the short-run, FDI in the previous period impacts negatively on the current account but this pattern is reversed if there is an inverse relationship between FDI and the current account, implying that FDI and exports are substitutes.

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