Abstract
This study examines the impact of domestic and foreign macroeconomic shocks on industrial development in emerging countries under uncertainty. Using data from 27 emerging countries from 1980 to 2019, we apply a PVAR approach along with GMM and bootstrap methods to address endogeneity issues. The results show that foreign direct investment (FDI) inflows have a positive and lasting impact on industrialization. However, a positive GDP shock – i.e. a sudden and significant increase in GDP – does not systematically lead to a positive effect on industrialization. Global economic changes, from crises to more open trade policies, and shifts in trade structures and supply chains, influence industrial development of these countries. While there are several transmission channels for these shocks (e.g. the dynamic effects of industrialization, investment, and the rise of the service economy), only the impact of a positive FDI shock consistently emerges as a clear determinant of industrialization. Conversely, openness-related shocks, such as those related to trade and capital account liberalization, do not have a direct effect. Therefore, public policies promoting FDI may significantly contribute to industrial development.
Published Version
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