Final Project of IFM

8/13/2019 Final Project of IFM

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Summary

This paper investigates the impact on foreign direct investment due

to the Inflation (Consumer Prices), Official Exchange Rate, GDP

(Current $ USD), GDP Growth Annual Percent Rate & Total Tax Rate of

Commercial of (03) three Asian countries i.e Pakistan, Bangladesh &India. Secondary data has been gathered from the websites and articles

during the time period of 1980 to 2011 for this purpose. In this paper,

five variables are used INF, GDP (Current & Growth), ER, TR are taken

as dependent variable whereas FDI is taken as independent variables.

To assess the impact of FDI on five dependant variables, time

series data regression has been used.


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Introduction

The issue of economic growth asymmetry across countries continually draws

academic interest and intellectual curiosity. What really contributes to this asymmetry

has puzzled the minds of economists and politicians for centuries. The new

millennium raises more questions and concerns about this issue. As a result, there is

a growing need to study it with more rigor and depth. Many less developed countries

(LDCs) have adopted outward- and forward-looking policies to promote economic

growth and employment. The roles of exports, foreign direct investment (FDI) and

the concomitants remittances of emigration are recognized as important economic

Growth-enhancing factors.

Although the adoption of such policies by LDCs is expected to exert positive

influences on overall GDP, it is uncertain how much is contributed by surging

exports, FDI, and remittances. The empirics of their effects on GDP generate mixed

and ambiguous inferences across countries over different sample periods and

across different developing countries. Therefore, this paper re-examines the roles of

these causal variables in promoting real GDP of Pakistan, Bangladesh, & Pakistan.

These three developing countries of South Asia have been selected because of

emphasizing active policies of export promotion and diversification, increasing

manpower exports and enticing FDI to boost economic growth as important

members of SARC (South Asian Regional Cooperation). The remainder of the paper

is organized as follows: section II reviews some of the related literature. Section-III

outlines the empirical methodology. Section IV reports the empirical results. Finally,

Section-V offers conclusions and policy implications.


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Foreign Direct Investment and GDP Growth

There is conflicting evidence in the literature regarding the question as to how, and

to what extent, FDI affects economic growth. FDI may affect economic growth

directly because it contributes to capital accumulation, and the transfer of new

technologies to the recipient country. In addition, FDI enhances economic growth

indirectly where the direct transfer of technology augments the stock of knowledge in

the recipient country through labor training and skill acquisition, new management

practices and organizational arrangements Foreign Direct Investment (FDI) is very

important to developing countries. Though foreign direct investment, individuals or

corporation obtain partial or total ownership of firms located in another country. But

foreign investor should have lasting interest and substantial control over the

investment. FDI contribute to growth through several channels. It directly affects

growth through being a source of capital formation. As a part of private investment,

an increase in FDI will, by itself, contribute to an increase in total investment. An

increase in investment directly contributes to growth. A large number of studies have

been done in the field of foreign direct investment and economic growth.

FDI is an important category of international investment that shows a long-term

relationship between the direct investor and the enterprise. It indicates the influence

of the investor on the management of the enterprise. Direct investment relates the

initial transaction between the investor and the enterprise. It also shows the

transactions between them and among affiliated enterprises, both incorporated and

unincorporated.


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Foreign Direct Investment and Exchange Rate

The investigation of relationship between exchange rate as well as its volatility andmacroeconomic variables including foreign direct investment got significant

importance in last few decades, particularly after the collapse of Bretton woods in

1971. After the collapse of this system, majority of the countries initiated the

flexible/floating exchange rate system and faced huge fluctuation in the value of their

currency prices.

The growing interest in foreign direct investment (FDI), stand from the perceivedopportunities derivable from utilizing this form of foreign capital injection into the

economy to augment domestic savings and further promote economic development

in most developing economies.

FDI is believed to be stable and easier to service than bank credit. FDI are usually

on long term economic activities in which repatriation of profit only occur when the

project earn profit. As stated by Dunning and Rugman (1985). Foreign Direct

Investment (FDI) contributes to the host countrys gross capital formation, higher

growth, industrial productivity and competitiveness and other spinoff benefits such as

transfer of technology, managerial expertise, improvement in the quality of human

resources and increased investment.

Other factors like higher profit from investment, low labour and production cost,

political stability, enduring investment climate, functional infrastructure facilities and

favourable regular environment also help to attract and retain FDI in the host

country.


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Foreign Direct Investment and Inflation

Modern growth theory rest on the view that economic growth is the result of capital

accumulation which leads to investment. Given the overriding importance of an

enabling environment for investment to thrive, it is important to examine necessary

conditions that facilitate FDI inflow. These are classified into economic, political,

social and legal factors. The economic factors include infrastructural facilities,

favorable fiscal, monetary, trade and exchange rate policies. The degree of

openness of the domestic economy, tariff policy, credit provision by a countrys

banking system, indigenization policy, the economys growth potentials, market size

and macroeconomic stability.



favourable regulatory environment also help to attract and retain FDI in the host

country.

Inflation as this term was always used everywhere and especially in these countries,

it is defined as increasing the quantity of money and bank notes in circulation and

the quantity of bank deposits subject to check. But most of the citizens today use the

term inflation to refer to the phenomenon that is a certain outcome of inflation, that is

the tendency of all prices & wage rates to rise.

Foreign Direct investment can also be describe as an investment made by an

investor or enterprises in another enterprises or equivalent in voting power or other

means of control in another country with the aim to manage the investment and

maximize profit. This investment involves not only the transfer of fund but also the

transfer of physical capital, technique of production managerial and marketing

expertise, product advertising and business practice with the aim to make profit.



favourable regular environment.


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Foreign Direct Investment and GDP Current

In measuring the impact of FDI on GDP, we expect the FDI that has come into the

host country this year to contribute to an increase in the FDP from next year

onwards. Note that FDI inflows in any year represent in general, the increase in FDI

inward stock as defined in the World Investment Reports. Since FDI is reported in

current US$, we use the GDP data also measured in current US$ to maintain

consistency.

After the global financial crisis, the status and importance of Asian economies have

increased a lot because of their more than expected resilience to financial crisis.

Asian economies are expanding rapidly and their growing clout can be felt from the

fact that out of top 5 economies of the world 3 are Asian. Asia, with the exception of

Japan, South Korea, Hong Kong and Singapore, is currently undergoing rapid

growth and industrialization spearheaded by China and India - the two fastest

growing major economies in the world but in the present paper we have taken theeconomies of 3 countries i.e Pakistan, Bangladesh & India.

FDI can accelerate growth in the ways of generating employment in the countries,

fulfilling saving gap and huge investment demand and sharing knowledge and

management skills through backward and forward linkage in the countries.


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Foreign Direct Investment and Tax Rate

Tax is classified into two main categories that is direct and indirect taxation. Direct

tax is imposed on properties, incomes and corporate profits etc. Indirect tax includes

value added tax, sales tax and import duty etc. In case of direct taxes, tax revenue

depends on a countrys policy, either it relaxes the direct taxes for attracting

foreign investment or imposes to collect revenue. For example, tax holidays

and tax credits for new foreign investment and exemption of import duty in

case of imports of raw material and machinery. Secondly, indirect tax depends

on the sales of goods and services.

FDI has generally positive effect on the economic growth and income levels in a

country, so there will be greater aggregate demand and economic activities in a

country which could help the government to generate more indirect taxes. In case of

Pakistan, major proportion of tax revenue is collected through indirect taxes. So, FDI

may have positive impact on the tax revenue in Pakistan.

According to Bond and Samuelson (1986), host countries could lose some tax

revenue in short run if tax holidays were given to attract FDI in early period.

Tax revenue could increase in the long run because foreign investment would

not pull out after that tax holiday period. Brander and Spencer (1987) stated that

host countries could attract FDI by imposing tariff on imports and relaxing the tax on

local production. It was stated that FDI could enhance national welfare by reducing

unemployment, rising productivity through technology transfers and raising

government revenue through taxation.


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Empirical Results

Documents

Final Project of IFM