The Relationship Between Defence Expenditure, Trade Openness and Foreign Direct Investments: The Case of BRICS and MINT Countries

doi:10.7176/jesd/13-4-01

Abstract

This study examines the relationship among trade openness, foreign direct investments and defence expenditures for the BRICS and MINT countries in the 1990-2019 period. As analysis method, it was estimated by Pesaran (2008) Cross-Section Dependency test, Hadri-Kuruzomi (2012) panel unit root test, Pesaran (2006) CCE test and Emirmahmutoglu and Kose (2011) panel causality tests. According to the test findings, a bidirectional causality relationship was found between defense expenditures and foreign direct investments for BRICS countries. In addition, for MINT countries, there is a one-way causality relationship from defense expenditures to foreign direct investments and from trade openness to defense expenditures. Keywords: Defence Expenditures, Trade Openness, Foreign Direct Investment, Panel Causality Analysis. DOI: 10.7176/JESD/13-4-01 Publication date: February 28 th 2022

Highlights

Developing countries prefer foreign resources, foreign borrowing or foreign direct investments as a source of financing while realizing their economic development goals (Cestepe et al, 2013: 2)
The zero (Ho) hypothesis was rejected because the probability values were less than 0.05 of the defence expenditures, trade openness and foreign direct investment variables calculated from table 1 so it was concluded that there is a cross-sectional dependency in series
According to model 2, where defence expenditures are taken as dependent variables for BRICS countries, it is concluded that a 1% increase in trade openness reduces defence expenditures by 0.0038%, while a 1% increase in foreign direct investments reduces defence expenditures by 0.0436%

Summary

Introduction

Developing countries prefer foreign resources, foreign borrowing or foreign direct investments as a source of financing while realizing their economic development goals (Cestepe et al, 2013: 2). The relationship between defence expenditures, foreign direct investments and trade openness variables with growth has been examined more. According to the geoeconomic favoritism hypothesis, it is explained that the increase in military power due to the increase in the defense expenditures of the countries will positively affect the foreign direct investments as it ensures the security of property rights (Drezner and Hite-Rubin, 2016: 2). When a detailed literature review is made, in the studies of Kennedy (1974), Benoit (1978), Whynes (1979), Barro and Sala-i-Martin (2004), Dunne, Smith and Willenbockel (2005), defense expenditures affect the trade and economic trust environment of countries. They say it will increase economic growth by raising it. Free trade regulations make it possible to increase defense expenditures (Solarin, 2017: 854, 855)

Data and Methodology

Pesaran CD (2004) Cross Section Dependency Test

Estimating Long Term Cointegration Coefficients

Findings

Emirmahmutoglu ve Kose (2011) Panel Causality Test

CONCLUSION