Total Investment, FDI and Growth Relationship
-
Upload
irfan-tarar -
Category
Documents
-
view
224 -
download
0
Transcript of Total Investment, FDI and Growth Relationship
-
7/31/2019 Total Investment, FDI and Growth Relationship
1/50
Presented by:
Irfan Ullah Tarar
Supervised by:
Dr. Nisar Ahmed
Total Investment, FDI and Growth
Relationship in Pakistan
-
7/31/2019 Total Investment, FDI and Growth Relationship
2/50
Agenda
Introduction
Review of Literature
Theoretical Framework
Data and Methodology
Empirical Results
Conclusion and Policy Implications
-
7/31/2019 Total Investment, FDI and Growth Relationship
3/50
Introduction
The FDI can be defined as: an investment made by a
resident of one economy in another economy and it is of a
long-term nature or of lasting interest, (UNCTAD, 2009)
-
7/31/2019 Total Investment, FDI and Growth Relationship
4/50
Importance of FDI Inflows
Promote Economic growth
Augment capital formation
Source of Human capital development
Diffused technology and spillovers
promote competition
Encourage Financial development
Source of bridging gap of saving-investment inLDCs(Source of external finance)
-
7/31/2019 Total Investment, FDI and Growth Relationship
5/50
Impact of FDI inflows on Total Investment
Complementary Effect (Crowding-in)
Substitution Effect (Crowding-out)
Neutral Effect (One-to-One Effect)
-
7/31/2019 Total Investment, FDI and Growth Relationship
6/50
Complementary Effect (Crowding-in Effect)
The TNCs can promote competition with domestic firms
Diffused modern technologies and positive spillovers
through FDI to domestic firms
Complement domestic firms production activities
-
7/31/2019 Total Investment, FDI and Growth Relationship
7/50
Substitution Effect (Crowding-out Effect)
The TNCs have comparative advantage over domestic
firms in managerial skills, financial resources, production
efficiency and technology
FDI inflows substitute domestic firms production activity,
it also leads to Crowding-out Effect
-
7/31/2019 Total Investment, FDI and Growth Relationship
8/50
Trends of FDI, Total Investment and
GDP Growth in Pakistan
FDI inflows during 1970s and 1980s are low
After restructuring of the economy in 1990s, FDI inflows
have moderate increase in 1990s and exponential growthduring 2003-2007
The FDI inflows and Gross Fixed Capital Formation ( TotalInvestment) have almost the similar trends during the studyperiod 1974-2009
The GDP Growth Rate fluctuates between 1.01% and10.2% during the study period 1974-2009
-
7/31/2019 Total Investment, FDI and Growth Relationship
9/50
FDI Inflows ($ million)
0
1000
2000
3000
4000
5000
6000
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
FDI Inflows($Million )
Source: UNCTAD(2011)
-
7/31/2019 Total Investment, FDI and Growth Relationship
10/50
FDI Inflows (As a Percentage of GFCF)
0
2
4
6
8
10
12
14
16
18
20
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
FDI Inflows (As a Percentage ofGFCF)
Source: UNCTAD(2011)
-
7/31/2019 Total Investment, FDI and Growth Relationship
11/50
Goss Fixed Capital Formation ($
Million)
0
5000
10000
15000
20000
25000
30000
35000
40000
Goss Fixed Capital Formation ($Million)
Source: World Development Indicators (2011)
-
7/31/2019 Total Investment, FDI and Growth Relationship
12/50
GDP Growth Rate (Annual %)
0
2
4
6
8
10
12
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
GDP Growth Rate (annual %)
Source: World Development Indicators (2011)
-
7/31/2019 Total Investment, FDI and Growth Relationship
13/50
Objectives of the Study
To test the short-run and long-run relationship among totalinvestment, FDI and economic growth in Pakistan
To check the crowding-in or crowding-out effect of FDI ontotal investment in Pakistan
To analyze the causal relationship among total investment,FDI and economic growth
To provide policy implications based on empirical results
-
7/31/2019 Total Investment, FDI and Growth Relationship
14/50
Literature Review
Van Loo (1977) examined the direct and indirect effects of
foreign direct investment on total investment in Canada for
the time period 1948-1966. The OLS and 2SLS techniques
were used to estimate the results. The coefficient of FDIwas 1.3981 which confirmed the evidence of
complementary effects ( crowding-in effect)
Lipsey and Kravis (1987) used cross- sectional and timeseries data and found that the growth rate was more closely
related to capital formation.
-
7/31/2019 Total Investment, FDI and Growth Relationship
15/50
Continued
De Long and Summers (1991,1992) used a cross-national
data from the 1950s to 1980s, and found a strong positive
causal relationship between capital investment and
economic growth.
Aitken and Hanson (1997) analyzed panel data on Mexican
manufacturing plants and found evidence of beneficial
spillovers from multinational enterprises to the Mexicaneconomy.
-
7/31/2019 Total Investment, FDI and Growth Relationship
16/50
Continued
Borensztein et al., (1998) analyzed the relationship betweenFDI and economic growth for a panel of 69 developingcountries. The minimum threshold of human capital wasnecessary for positive effects of FDI on economic growth.The study also found the supportive evidence of crowding-
in effect of FDI on domestic investment.
Agosin and Mayer (2000) developed total investmentmodel to analyze crowding-in or crowding-out effect of
FDI inflows for a panel of three developing regions (Asia,Africa and Latin America) and found crowding-in effect inAsia, but less so in Africa, and strong crowding-out in LatinAmerica.
-
7/31/2019 Total Investment, FDI and Growth Relationship
17/50
Continued Weinhold and Nair(2001) used causality tests for cross-
country panel of 24 developing countries to look at
dynamic relationship between FDI and economic growth
from 1971-1995 and found that there was a quite
heterogeneous effect of FDI on economic growth acrosscountries.
Chakraborty and Basu (2001) applied co-integration and
Error- Correction approaches to study long-run and short-run relationships between GDP and FDI in India for the
period 1974-1996. It was found that GDP in India had no
Granger causality by FDI, but causality from GDP to FDI
was present.
-
7/31/2019 Total Investment, FDI and Growth Relationship
18/50
Continued Misun and Tomsik (2002) used total investment model of
Agosin and Mayer (2000) to analyze crowding-in or
crowding-out for a panel of three countries; Czech
Republic, Hungary and Poland for time period 1990-2000.
The evidence of crowding-in was found in Hungary andCzeck Republic and crowding-out in Poland.
Kim and Seo (2003) analyzed the relationship among
inward FDI, economic growth and domestic investment forKorea over the time period 1985-1999. The VAR
methodology was used to estimate the results and found no
evidence of crowding-out effect of inward FDI on domestic
investment.
-
7/31/2019 Total Investment, FDI and Growth Relationship
19/50
Continued Backer and Sleuwaegen (2003) analyzed firms entry and
exit in Belgian manufacturing sector in the presence of FDI
and import competition and found the evidence of
crowding-out of domestic firms.
Choe (2003) examined the causal relationship among
economic growth, FDI and gross domestic investment
(GDI) for a panel of 80 countries over the period of 1971-
1995. There was a bidirectional causality between FDI andeconomic growth and the effects of economic growth were
stronger than FDI when the outliers were excluded for 80
countries from 1971-1995. In case of economic growth and
GDI, the causality ran in only one direction from economic
growth to GDI.
-
7/31/2019 Total Investment, FDI and Growth Relationship
20/50
Continued
Hansen and Rand (2006) analyzed the causal link between
FDI and economic growth for a panel of 31 developing
countries from Asia, Latin America and Africa over the
period of 1970-2000. The VAR methodology was used intheir study. The results supported the strong causal link
from foreign direct investment to economic growth in the
long run. It was also concluded that a higher ratio of FDI in
gross capital formation had positive effects on the level ofGDP and hence on economic growth in the long-run.
-
7/31/2019 Total Investment, FDI and Growth Relationship
21/50
Continued
Chowdhury and Mavrotas (2006) analyzed the causal
relationship between FDI and economic in a panel of Chile,
Malaysia and Thailand for the period of 1969-2000. The Toda-
Yamamoto test for causality analysis was used and found that
GDP Granger caused FDI in Chile and bidirectional causality
in Malaysia and Thailand.
Yang(2007) used panel data for 110 countries from 1973 to2002 to analyze the relationship between FDI and growth and
found the effect of FDI on growth was different over time and
across regions.
-
7/31/2019 Total Investment, FDI and Growth Relationship
22/50
Continued
Ozturk and Kalyoncu (2007) investigated the impact of FDI
on economic growth for Turkey ad Pakistan over the period
of 1975 to 2004 and found that it was GDP that caused FDI
in the case of Pakistan, while there was a bi-directionalcausality between the two variables for Turkey.
Sarkar (2007) used panel data of 51 less developed
countries for the period of 1981 to 2002 and time seriesdata from 1972-2002 and found mixed relationships
between FDI and economic growth across panel.
-
7/31/2019 Total Investment, FDI and Growth Relationship
23/50
Continued Tang et al., (2008) used quarterly data from 1981:1 to
2003:4 and analyzed the relationship among the FDI
inflows, domestic investment and economic growth in
China. The study found that FDI inflows complemented
domestic investment. The GDP and domestic investmenthad bidirectional causality relationship and FDI inflows had
unidirectional causality with domestic investment and GDP
Th i l F k d M d l
-
7/31/2019 Total Investment, FDI and Growth Relationship
24/50
Theoretical Framework and Model
Specification
A model of total investment in the presence of FDI by MNEsin the host country which is developed by Agosin and Mayer
(2000) is used in this study.
The model is based on the following identity:It =If,t+ Id,t (1)
Where,
It = Total investment in time period t
Id,t = Domestic investment in time period t
If,t = Investment by MNEs in host country in time
period t
-
7/31/2019 Total Investment, FDI and Growth Relationship
25/50
Continued
Domestic investment:
An accelerator model of investment is as:
Id,t= + 1GDPGt (2)
Where, GDPGtis GDP Growth Rate in time period t.
And Investment by MNEs:
If,t= f(FDIt) (3)
-
7/31/2019 Total Investment, FDI and Growth Relationship
26/50
Continued
Total Investment:
I = + 1GDPG + FDI (4)
Here , FDIis used for FDI inflows by MNEs
The more general form of total investment:
I = + 1GDPG + 2FDI (5)
The econometric model of Total Investment:
It= + 1GDPGt+ 2FDIt+ t (6)
-
7/31/2019 Total Investment, FDI and Growth Relationship
27/50
Continued
There are three possible outcomes:
(i) Crowding-in:
if, 2>0
(ii) Crowding-out:
if, 2
-
7/31/2019 Total Investment, FDI and Growth Relationship
28/50
-
7/31/2019 Total Investment, FDI and Growth Relationship
29/50
Data and Methodology
Data description and sources
Variables DescriptionLRGFCF Natural log of real gross fixed capital formation ($ million)
LRFDI Natural log of real foreign direct investment inflows ($ million)
GDPG Growth rate of GDP (%)
-
7/31/2019 Total Investment, FDI and Growth Relationship
30/50
Sources of Data:
Online World Development Indicators (2011)
Online World Investment Report (UNCTAD,2011)
-
7/31/2019 Total Investment, FDI and Growth Relationship
31/50
Methodology
1. Unit root test (ADF-test and PP-test)
2. Cointegration ( Bound test Approach)
3. Error Correction Model in ARDL(p,q,r) Framework
4. Diagnostic Tests and Stability Analysis
5. Granger Causality tests
-
7/31/2019 Total Investment, FDI and Growth Relationship
32/50
The ARDL(p,q,r) Model
The General Form of Unrestricted ECM model in ARDL(p,q,r)formulation:
Here,
is the first difference operator
The coefficients of first part such as:i,i, and i, represent the
short run dynamics
The coefficients 1,2, and 3 represent the long run
relationships between the variables
And t is used for white noise error term in the model
(7)
-
7/31/2019 Total Investment, FDI and Growth Relationship
33/50
The Bound Test for Cointegration
It is the most suitable technique for small samples
It is applicable whether the variables areI(0), I(1) or mixed
There is no need for pre-testing for unit roots
Only a single reduced form equation is used for long runrelationships
Different variables have different optimal lags
-
7/31/2019 Total Investment, FDI and Growth Relationship
34/50
Continued
The bound test (F-test) is used to test the existence of long
run relationship between the variables.
Null Hypothesis:
H0 :1=2=3=0
Alternative Hypothesis:
Ha :10, or 20, or 30
-
7/31/2019 Total Investment, FDI and Growth Relationship
35/50
Continued
There are three possible outcomes:
1. If F-stat> upper bound (cointegration)
2. If F-stat< lower bound (no cointgration)
3. If F-stat lies between upper and lower bound(inconclusive)
-
7/31/2019 Total Investment, FDI and Growth Relationship
36/50
The Long Run ARDL(p,q,r) Model
If cointegration found in the general form of unrestricted
ECM model in ARDL(p,q,r) formulation, then the
following long-run ARDL(p,q,r) model will be estimated:
(8)
-
7/31/2019 Total Investment, FDI and Growth Relationship
37/50
The ECM Model
The following ECM model in ARDL(p,q,r) formulation is
used to estimate short-run relationships between total
investment, FDI and economic growth.
(9)
-
7/31/2019 Total Investment, FDI and Growth Relationship
38/50
The Empirical Results
Descriptive Statistics:Variable(s) LRGFCF LRFDI GDPGMaximum 5.5798 3.8741 10.2157Minimum 4.7677 -.80829 1.0144Mean 5.2763 1.7487 5.0974Std. Deviation .23810 1.0412 2.1106Skewness -.71770 -.18917 .16247Kurtosis - 3 -.75562 .25636 -.38687Coef of
Variation.045126 .59538 .41406
-
7/31/2019 Total Investment, FDI and Growth Relationship
39/50
Correlation Matrix
LRGFCF
LRGFCF LRFDI GDPG
1.0000 .12066 .51243
LRFDI .12066 1.000 -.12379
GDPG .51243 -.12379 1.0000
-
7/31/2019 Total Investment, FDI and Growth Relationship
40/50
Unit Root TestsADF-Test (intercept and no trend) PP-Test (intercept and no trend)
Variable At level At 1stdifference Critical Values At level At 1stdifference
LRGFCF -2.43 -3.44** 1% -3.63 -2.59 -3.08**
GDPG -2.57 -5.67*** 5% -2.94 -4.30*** -11.04***
LRFDI -1.34 -2.85* 10% -2.61 -2.64* -7.7***
Note: (***) significant at 1% level
(**) significant at 5% level
(*) significant at 10% level
-
7/31/2019 Total Investment, FDI and Growth Relationship
41/50
The Bound Test for Cointegration (F-test)
Dependent variable F-Statistics lag F-critical value* Conclusion
I(0) I(1)
F(LRGFCF/LRFDI,GDPG) F(3,19)= 7.67 3 3.793 4.855 Cointegration
F(LRFDI/LRGFCF,GDPG) F(3,19)=1.82 3 3.793 4.855 No Cointegration
F(GDPG/LRGFCF,LRFDI) F(3,19)=7.5 3 3.793 4.855 Cointegration
Note:(*) The critical value bounds are taken from Table CI(iii) of Pesaran et al.(2001)
-
7/31/2019 Total Investment, FDI and Growth Relationship
42/50
The Long-Run Results
ARDL(1,0,1) selected based on Schwarz Bayesian Criterion
Regressor Coefficient Standard Error T-Ratio[Prob]
LRFDI 0.037111 0.046303 .80148[.430]
GDPG 0.17081 0.031800* 5.3714[.000]
C 4.3337 0.21185* 20.4570[.000]
Note: (*) Significant at 1% level
-
7/31/2019 Total Investment, FDI and Growth Relationship
43/50
The ECM Results
Error Correction Representation for ARDL (1,0,1) selected based onSchwarz Bayesian Criterion
Regressor Coefficient StandardError
T-Ratio
[Prob]dLRFDI 012587 .015435 .81550[.421]dGDPG .026148 .0065873* 3.9695[.000]dC 1.4699 .34548* 4.2547[.000]
ecm(-1) -.33918 .068235* -4.9707[.000]Note: (*) significant at 1% level
-
7/31/2019 Total Investment, FDI and Growth Relationship
44/50
Diagnostic TestsTest Statistics LM Version F Version
A:Serial Correlation
B:Functional Form
C:Normality
D:Heteroscedasticity
R2 =.90457
R-bar Squared=.89093
DW-statistic=1.9885
Durbin's h-statistic=
.035971[.971]
CHSQ(1)= .43836[.508]
CHSQ(1)= 1.9263[.165]
CHSQ(2)= .62771[.731]
CHSQ(1)= 1.9058[.167]
F( 1, 27)= .36349[.552]
F( 1, 27)= 1.6738[.207]
Not applicable
F( 1, 31)= 1.9000[.178]
-
7/31/2019 Total Investment, FDI and Growth Relationship
45/50
Stability Tests
Cumulative Sum of Recursive Residuals ( CUSUM)
Cumulative Sum of Square of Recursive Residuals
(CUSUMSQ)
-
7/31/2019 Total Investment, FDI and Growth Relationship
46/50
Continued
CUSUM(Cumulative Sum of Recursive Residuals)
Plot of Cumulative Sum of Recursive Residuals
The straightlines represent critical bounds at5% significance level
-5
-10
-15
0
5
10
15
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 20092009
-
7/31/2019 Total Investment, FDI and Growth Relationship
47/50
Continued
Cumulative Sum of Square of Recursive Residuals(CUSUMSQ)
Plot of Cumulative Sum of Squares of Recursive Residuals
The straightlines represent critical bounds at5% significance level
-0.5
0.0
0.5
1.0
1.5
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 20092009
-
7/31/2019 Total Investment, FDI and Growth Relationship
48/50
-
7/31/2019 Total Investment, FDI and Growth Relationship
49/50
Conclusion
The FDI inflows are statistically insignificant determinantof total investment in the short-run as well as in the long-
run during the study period 1974-2009.
The GDPG is highly significant determinant of total
investment for both short-run and long-run. The speed of adjustment (ECM coefficient) after
disequilibrium is moderate which is about -0.339
Bidirectional Granger causality exists between LRFDI and
LRGFCF (LRFDI LRGFCF) Unidirectional Granger causality between GDPG and
LRGFCF (GDPG LRGFCF)
No Granger causality between LRFDI and GDPG
-
7/31/2019 Total Investment, FDI and Growth Relationship
50/50
Policy Implications
GDP growth rate has statistically significant positive effecton total investment, therefore policy makers should adopt
those measures which will help to improve GDP growth
rate in Pakistan
The statistically insignificant effect of FDI inflows on total
investment may be due to small share of FDI inflows to
Gross Fixed Capital Formation
Need to attract FDI inflows in real sector
Need to overcome those factors which are responsible for