Foreign Direct Investment, Terms of Trade, and Quality Upgrading: What is So Special About South Asia?

Asian Development Review 33:1, 2016

28 Pages Posted: 9 Apr 2016

See all articles by Konstantin M. Wacker

Konstantin M. Wacker

University of Groningen - Faculty of Economics and Business

Philipp Grosskurth

Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI)

Tabea Lakemann

University of Goettingen (Göttingen)

Date Written: April 4, 2016

Abstract

The existing literature has highlighted the positive effect of foreign direct investment (FDI) on export upgrading and associated terms of trade in developing economies. However, the FDI effect has been found to be negative in South Asia. In this paper, we elaborate on the South Asia-specific effect by emphasizing the role of human capital in the positive link between FDI and terms of trade. We argue that education levels in South Asia have lagged behind those in East Asia and other developing regions. This has resulted in a world market integration strategy in South Asia that specializes in less skills-intensive products and generates associated FDI flows. We demonstrate these patterns for two South Asian economies (Bangladesh and Pakistan) and two East Asian economies (Malaysia and Thailand) for which historical breakdowns of FDI data are available.

Keywords: development, FDI, Prebisch–Singer hypothesis, terms of trade

JEL Classification: F23, O11, O57

Suggested Citation

Wacker, Konstantin M. and Grosskurth, Philipp and Lakemann, Tabea, Foreign Direct Investment, Terms of Trade, and Quality Upgrading: What is So Special About South Asia? (April 4, 2016). Asian Development Review 33:1, 2016, Available at SSRN: https://ssrn.com/abstract=2759540

Konstantin M. Wacker (Contact Author)

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

HOME PAGE: http://sites.google.com/rug.nl/kmwacker

Philipp Grosskurth

Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI) ( email )

Hohenzollernstraße 1-3
Essen
Germany

Tabea Lakemann

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

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