The Impact of Foreign Direct Investment on Developing Countries’ Terms of Trade

This paper first shows that important economic arguments in favor of the Prebisch- Singer hypothesis of falling terms of trade of developing countries have implicitly relied on the role of multinational corporations and foreign direct investment. As of yet, the relationship between the latter and terms of trade has not been empirically investigated. In order to start closing this gap in research, data on 111 developing countries between 1980 and 2008 is analyzed using panel data methods. The empirical results suggest that there is no reason to believe multinationals’ activities were responsible for a possible decrease of the developing countries’ net barter terms of trade. On the contrary, foreign direct investment seems to play a positive role for developing countries’ terms of trade. The paper also investigates other possible variables structurally influencing terms of trade and thus provides fruitful directions for future research.