Conference Paper
Do Capital Flows Cause (De)Industrialization?
No.
ERF29AC_66
Publisher
ERF
Date
May, 2023
The conventional theory maintains that movement of capital from rich economies with lower rate of return to poor economies with higher rate of return provides efficient capital allocation, lowers the cost of capital and increases production. The recent literature, however, does not provide an empirical support to benefits of financial openness. In this context, this study aims to investigate the effect of capital flows on manufacturing industry which disaggregated as low- and high-technology. Our estimation results suggest that the impact of capital flows is to lower manufacturing in advanced (AE), emerging market and developing (EMDE) and Middle East and North Africa (MENA) economies. As consistent with the sectoral reallocation argument, this implies that capital flows lead to movement of resources out of the manufacturing sector. This effect appears to be the case for high-technology manufacturing industry in AE and EMDE whilst it seems to be hold for low-technology manufacturing industry in MENA. On the other hand, capital flows encourage low-tech manufacturing industries in all country groupings, except MENA. This empirical finding indicates that capital flows also lead to the allocation of resources within the manufacturing industry from high-tech to low-tech. All these imply that industrialization policy should include measures related with financial openness and policy makers should consider the use of capital flow management measures to protect the manufacturing industry from the side effects of capital flows.
Authors
Fatma Taşdemir
Faculty Member, Department of International Trade and...