Recent Us Bop Performance - Is the Sky Falling?

Foreign capital inflows and trade exports are important to any country but determining which measure is more important is decided by country size. Economies of varying sizes global have differing financial markets, governmental policies, and stages of economic development so one measure will be insufficient to determine which is most important. In a study conducted by Syed Ali Raza and Syed Tehseen Jawaid to determine if foreign capital inflows had a positive impact on economic growth on select Asian countries found that FDI has a negative relationship with stock market capitilziation.1 Raza and Jawaid also found the economic growth is positively associated with stock market capitalization leading to a conclusion that exports are more important to an economy.  These findings are also supported by Raghuram Rana, Economic Counselor and Director of the Research Department at the International Monetary Fund. Rana in a presentation organized by the Federal Reserve Bank noted that Foreign capital is unlikely to help grow poor countries more than domestic capital.2 Rana however goes on to note that industrialized countries, like the United States, have had a spur of economic productively which can be tied to FDI. Furthermore, in a study done by Lucyna Kornecki studying performance of inward and outward U.S. FDI during the recent financial crisis found that FDI into the U.S. contributed greatly to economic growth.3 

        These studies lead me to conclude the foreign capital inflows are more important to the United States economy rather than exports. This is due to FDI direct contribution to economic growth and the confidence it shows from foreign companies in the United States’ economic status. FDI inflows can be used to grow businesses, create jobs, and even be turned into outward FDI. While trade deficits are not something that is by itself beneficial to an economy it can show that a country is growing rapidly. Trade deficient could be explained away by economic expansion that results in excess income which can be spent on foreign goods that other countries may not have to spend on U.S. goods. Also, as noted in the text from the 2012 BOP data the U.S. only has a trade deficient in manufacturing yet a trade surplus in services. In a time when large economies are more serviced based than manufacturing it shows that the U.S. is still in a strong financial position.

        Looking at the connection between the U.S. current account deficit and capital account surplus is that they have an inverted relationship. According to the BOP accounting current account deficits are balanced by capital account surplus and vice-versa. This is because capital account surplus can be used to finance current account deficient or current account surplus can finance current capital account deficits.

        As noted in the case study companies that are threatened by imported goods or by foreign built domestic factories will support the “sky is falling” viewpoint. These would be import-threatened textile producers and textile workers. This is due to cheaper products and labor offered by foreign countries such as those in Latin America and Asia. U.S. textile producers will be unable to be price competitive with their foreign competitors who have more relaxed labor laws and textile workers will find the companies moving to foreign countries in search of cheaper labor. The California bio-tech company would be most likely find FDI in their favor in the hopes that another company or investor infuses them with cash. The same goes for Merrill Lynch who as a financial services provider who will take FDI to finance its own operations or use their current funds to invest in companies helped by FDI. Lastly Boeing will also not support the “sky is falling” view as their a focused-on exports so foreign investment is unlikely to affect their operations.