The Relationship between Imports and Foreign Direct Investment: A Study on Selected Acceded Developing Countries to the World Trade Organization

According to relevant international economics theories, imports either substitute for or complement FDI. The present study aims to examine this issue in 27 selected developing countries that joined the WTO during 1990-2019. At the first step, Granger and Dumitrescu-Hurlin tests were used to determine the direction of causality between two variables. The results demonstrated a strong one-way causal relationship from imports to FDI. Then, the effect of imports on FDI was estimated by FGLS method. The results showed a significant positive effect of imports on FDI. Hence, in the selected countries, imports complemented FDI rather than replacing it. This finding confirms that a competitive economy in which low barriers are imposed on imports is more attractive for foreign investors than a protected economy. The results also confirmed the hypothesis of the positive effect of accession to the WTO on FDI absorption. The obligation of the member states of the WTO to observe the principle rules of non-discrimination and transparency (through binding their tariffs and trade regulations), as well as to respect all aspects of intellectual property rights and above all the efficiency and effectiveness of the Dispute Settlement Body (DSB) of the WTO are among the main reasons behind this fact. Therefore, Iran by lowering its tariffs through joining the WTO, not only does not cause destruction of its industries in long run but it is expected to accelerate the economic growth based on its comparative advantages.