The link between budget deficits and foreign direct investment

Debate has focused on the nature of the connection between foreign direct investment and the budget deficit. Moreover, the majority of earlier research papers looked at a unidirectional relationship between FDI and the budget deficit. Theoretical and empirical research on FDI and the budget deficit is thus examined in this paper. However, the empirical research confirms that there is a reciprocal relationship between FDI and the budget deficit, and a number of theories were assessed on both topics. Although there is evidence linking foreign direct investment (FDI) to the budget deficit, the findings of these studies are contradictory, with the majority of empirical research showing a positive association and a small number showing a negative one. Consequently, this paper provides an outline of the theories related to each of them and explains how the budget deficit and foreign direct investment are related.