Determinants and Causality of Current Account Balance and Foreign Direct Investment: Lower Middle Income Countries in ASEAN

Abstract

This study investigates the determinants and causality between current account balance and foreign direct investment in Association of Southeast Asian Nations (ASEAN) in lower middle income countries. This study uses time series from 2000-2017 and cross section of 6 countries, namely Indonesia, Philippines, Vietnam, Lao, Myanmar and Cambodia, which were analyzed using simultaneous equation model approach. There are three important findings in this study. First, current account balance is positively affected by financial development, government expenditure, real GDP and real exchange rate, while negatively affected by foreign direct investment. Second, foreign direct investment is positively affected by real GDP, real exchange rate, economic openness and current account balance, while negatively affected by inflation. Third, there is a causal relationship between current account balance and foreign direct investment, which the two variables significantly influence each other. Therefore, it is highly recommended for lower middle income countries in ASEAN to intervene in macroeconomic policy variables, so that the deficit conditions for current account balance and foreign direct investment can be reduced in the lower middle income countries in ASEAN.
 Keywords: current account balance, foreign direct investment, determinants, causality, lower middle income countries, ASEAN.

Analysis of the Current Account Balance in the Turkish Economy with NARX: A Non-linear Approach

“…The authors determined that income, budget balance, first international investment position, dependency ratio, and fuel balance were associated with the CAB. Aimon et al (2020) analyzed the CAB of low-and middleincome ASEAN countries with the simultaneous equation model approach for 2000-2017. According to the analysis outcomes, while the CAB is positively affected by financial expansion, government expenditures, real GDP, and real exchange rate, it is adversely affected by foreign direct investments.…”

The Impact of Monetary Policy and Macroeconomic Indicators on the Current Account in Developing ASEAN

“…This is in line with the statement by [6], namely the main support that influences a country's current account balance is the trade balance which is considered to be the largest contribution to the current account balance, especially trade in goods (commodities). So that international trade, in this case exports and imports, is important in influencing the current account surplus in each country [7]. According to [8] developing countries tend to experience greater export volatility than developed countries.…”

“…This means that the level of people's economic activity is increasing, including consumption of goods from abroad or increasing demand for imported goods to meet high expenditures, which will eventually create a current account deficit. Another macroeconomic indicator that can affect the imbalance in the current account balance is foreign direct investment (FDI) because international trade gives investors the freedom to invest in a country [7]. The widening current account position can be attributed to increased globalization, which has increased cross-border trade and flows of financial capital.…”