Investigating the Role of Economic Risk, Foreign Direct Investment, Exchange Rate, Economic Growth and Globalization on Trade Balance in E7 Economies

Abstract

In recent years, globalization has drastically increased exposure to economic risk for the whole world. Our study investigates the impact of economic risk (ERI), exchange rate (EXR), foreign direct investment (FDI), economic growth (EG), and globalization index (KOF) on the trade balance (TB) in E7 namely, China, India, Indonesia, Mexico, Brazil, and Turkey for the period 1990-2018. The substantial positive correlation between TB and ERI is confirmed by CS-ARDL, both over the short and long terms. Conversely, EXR has a beneficial effect on TB. EG has an insignificantly negative effect on TB. Both FDI and KOF have detrimental long-term effects on TB; however KOF's effect is insignificant. According to the findings of FGLS and Kao DOLS approach trade balance is positively impacted by economic risk. Results indicate that EG has a detrimental effect on TB, but insignificant under DOLS. However, effect of FDI on TB is unfavorable. In contrast, EXR have a positive impact on TB but insignificant under DOLS. Lastly, KOF shows a negative impact on TB. Furthermore, the second-generation JKS test is employed to check the causality among the variables. The results show the unidirectional causality between economic risk and trade balance. The policy insinuation is that the government should take the initiative to predict the various potential impacts of economic risk on trade balance. In addition, policymakers should focus on economic risk management to safeguard trade balance.