Business-cycle asymmetry and causality between foreign direct investment and fixed capital formation
Author:Kuan-Min Wang, Yuan-Ming Lee, Thanh-Binh Nguyen Thi
JEL:C10, F20, F40
DOI:
Keywords:foreign direct investment, gross direct investment, current depth of recession,
Threshold model
Abstract:
This study creates the threshold vector autoregression model and employs quarterly data of
Taiwan from 1981 to 2006 to examine the relationship between foreign direct investment
(FDI) and domestic gross direct investment (GDI). Our framework provides a consideration
of business cycle asymmetry that quite differs from the existing approach. We find that (1)
the long-run relationship between FDI and GDI is complementary; (2) the relationship
between FDI and GDI is substitutive during expansion, however, is complementary during
recession; (3) a depreciation of the Taiwanese Dollar helps attract FDI during expansion,
but decrease GDI during recession; (4) the negative impact of Taiwan’s outward foreign
direct investment and national saving on GDI, the negative impact of GDP on GDI and the
negative impact of Taiwan’s outward investment on FDI are only evident during recession;
and (5) macroeconomic variables indirectly affect FDI during expansion and GDI during
recession through the adjusting process toward equilibrium.