DO NET FOREIGN DIRECT CAPITAL INVESTMENTS FOLLOW THE PATH OF THE KUZNETS CURVE AND EVEN A W-CURVE?

Abstract

Originally, Kuznets described income per capita and income distribution relationship of a country by an inverted U-shaped curve; later, developed with the same logic, income per capita and environmental pollution relationship of a country is defined by an environmental Kuznets curve. Accordingly, this study hypothesizes that the development status of countries, reflected by their income per capita, and the per capita net foreign direct capital investments flowing into their countries show the path of a Kuznets curve. After classifying countries as less-developed countries, developing countries, and developed countries, the relationship between their per capita incomes and their per capita net foreign direct capital investments is empirically investigated for the trend of a classical Kuznets curve. To this end, panel data econometric analyzes are conducted for a total of 59 countries in the three categories of economic development that have adequate data sets for the period of 1982-2015. The findings confirm the empirical existence of an inverted U-shaped Kuznets curve between per capita income and per capita net foreign direct capital investments; furthermore, the relationship goes on to show a trend of a W-shaped curve. In other words, this relationship is observed to work in such a way that initially less-developed countries are not able to attract much foreign direct investments; but then, parallel to advancements in the development status to becoming a developing country, the ability to attract foreign direct investments improves; however, after reaching a certain high per capita income level, developed countries show a tendency to relocate their industrial manufacturing facilities and invest in developing countries rather than domestically, which results in an outflow of foreign direct investments; and finally, highly developed countries are again willing to attract large amounts of foreign direct investments. The overlap between theoretical expectations and econometric results of this study is believed to open up a discussion in the economic literature about the presence of a new and extended type of the Kuznets curve.