Impact of GDP on FDI: Study of empirical Relationship between GDP and FDI

7/29/2019 Impact of GDP on FDI: Study of empirical Relationship between GDP and FDI

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IMPACT OF GDP ON FOREIGN DIRECT INVESTMENTS

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ACKNOWLEDGMENT

First of all, we would thank Allah Al-mighty whose mercy and grace

allowed us to be a part of University of Karachi and work on this detailed

analysis of the relationship between Interest Rates and Inflation of three

different countries. It gives us immense pleasure to study our degree course

from this acknowledged and revered institution in Pakistan. It is by virtue of our

university and kind teachers that we have a launching platform to exhibit our

hidden talents and skills in the industry.

Last, but not the least, we are very thankful to Maam Hunain Zaki who

gave us a brilliant topic to explore. The relationship and Impact of GDP over

FDI (Foreign Direct Investment) is indeed the most discussed topic in the

financial markets. It has been the keen interest of economists to study and

develop a strong understanding about the effects and behavior of FDI with

respect to GDP. We are also indebted to all other people who played an integral

part in completing this assignment, especially the librarians, who helped us in

conducting secondary research.


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Analysis of the effects of Interest Rates

over Inflation of three different economies

i.e. Bangladesh, India and United States

based on the data of 21 years from 1990

to 2010

Impact of

GDP on FDIStudy of the relationship between

GDP and FDI


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ABSTRACT

FDI is indeed an integral role player in any countrys economy. The

importance and advantages of FDI cannot be ignored as they tend to have a significant

importance from many aspects. However, it is still an enigma that whether GDP is an

important factor impacting FDI or not. Therefore, this paper attempts to investigate

the effect of GDP on FDI of China and Pakistan. To take care of the issue of structural

change in economy, time period of the study is taken to be 1990-2010.

The relationships between these two factors vary grossly depending upon the

economy in consideration. Growing economies like BRICS (Brazil, Russia, India,

China and South Africa) have a different responsiveness ratio than what is seen in

third world economies. Therefore, it is imperative to analyse two different economies

i.e. emerging and a third world economies, before reaching on any conclusion about

the impact of GDP on FDI.

Keywords: GDP, FDI, BRICS, economy


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TABLE OF CONTENTS

Title Page .i

Acknowledgment ...ii

Cover Page ........iii

Abstract .iv

Table of Contents ...v-vi

1. INTRODUCTION 1-2

2. REVIEW OF LITERATURE .3-4

3. METHODOLOGY ...5-6

4. DATA ANALYSIS

4.1 Data Analysis ofPakistan...7-11

4.2 Data Analysis of China 12-15

5. CONCLUSION .16-17

6. APPENDICES

6.1 References. .18

6.2 Secondary Sources 19


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INTRODUCTION

The term FDI (Foreign Direct Investment) refers to the direct investments

into production and businesses in a country by another country. These direct

investments can be of many kinds like either by buying a company in the target

country or by expanding the operations of an existing business in that country.

Examples are as a company in Japan, Toyota has opened a plant in Shah Alam,

Malaysia is considered as an FDI inflow of Malaysia.

The inflows of FDIs are always beneficial for countries as there are many

advantages associated with these FDIs. Some of the advantages that FDI

inflows bring are highlighted below:

Improves the quality of products and process in a particular sector,increased attempts to better Human Resource.

Creates jobs, in an effort to increase productivity, skilled and semi-skilled workers needed.

Reduces unemployment which ultimately eliminates further socialproblems


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Although, there are many advantages of FDI and the host country enjoys

the perks and benefits of FDIs by way of hefty inflows, however there are some

disadvantages of FDIs too, but that are negligible against the benefits it provide.

Since FDI is considered to be a positive impact creator on the overall

economy, therefore in this assignment we are going to investigate the behaviour

and impact of GDP on FDI. Whether the FDI responds with the change in GDP

or not and if it is responsive, then up to what extent? These questions will be

answered in this assignment by way of investigating the patterns and trends

considering the past data of two different economies i.e. China and Pakistan.

The reason for choosing such two different economies is to study the

impact of GDP on FDI in two different scenarios. China being the part of

BRICS would reveal the fact about emerging economies, whereas Pakistan on

the other hand would help to illuminate the other side of the picture. The GDP

of China has been on exponential growth since 1990s, whereas the GDP of

Pakistan has been through several ups and downs. Similarly, the FDI of

Pakistan has a non-linear pattern, whereas on the other hand the FDI of China

has been growing since 90s except for a sharp decline in 2009 Global Financial

Crisis.

In order to make sure that our analysis of impact of GDP on FDI has

significant findings and to conclude in a justified manner, 20 years of data of

GDP and FDI has been obtained of both countries from reliable sources.


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REVIEW OF LITERATURE

The topic of impact of GDP on FDI has always been of prime importance

for the economists as every country focuses on increasing its FDI. If it would be

evident that GDP brings significant impact on Foreign direct investments,

economists will then focus on increasing GDP in order to boost the FDIs.

Since this issue has been a burning question, a number of attempts have

been made previously by different researchers in order to observe the behavior

of FDI with respect to GDP. In this regard, the work of Pakistan Institute of

Development Economics is significant. The studies and researches conducted

by several researches of PIDE have proved with their analysis that GDP has a

positive impact on FDIs. If the GDP is increasing, FDIs will also increase and

the ratio of FDI increase to GDP is dependent upon the increase rate of GDP

(Arshad & Ali, 2011).

According to Agrawal & Khan (2011), several other factors like Labor

Force, Human Capital, Government incentives, developed infrastructure and

macroeconomic climate also cast an impact of FDIs up to some extent.

However, in mature and emerging economies, the GDP is the only factor that


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leads FDI growth and stability. On the other hand, third world economies like

Pakistan and Bangladesh do not have such significant impact of GDP on FDIs.

Since the economic growth of third world economies is always fluctuating,

therefore the FDI inflows are dependent upon several other factors too and GDP

is not the only factor impacting FDIs in third world economies.

In a recent about SAARC countries, published in Global Journal of

Management and Business Research (2011), it was clearly shown that in the

economy of Pakistan, GDP has a positive impact on FDI. As in the growth rate

of Pakistan attracts, regardless of the political instability is attracting investors

to invest their capital into Pakistani markets. There are other factors that are

mentioned in the paper like the geo-political importance of Pakistan, market

needs; consumer behavior and transmuting trends are also casting great impact

on FDI inflows.

Many of the researches that have previously been done in this area are

mostly about how well the economies are doing with their increased FDIs, but

they lack about the clarity of whether the FDIs are dependent on GDP growth or

not. Therefore, in this paper, we are going to clarify with the help of data

analysis through various statistical tools that whether the increase in GDP turns

out to be favorable for FDIs or not.


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METHODOLOGY

To do any form of research, there has to be some underlying assumptions

that must govern the research that needs to be done:

1) - The data must be free from all biases

2)The data must be free from all distortion

3)The research should take into factors both the descriptive statistics and the

theoretical values of the data

4) - Its also assumed that the available statistic data is true to date

5) Its also assumed that there wont be any drastic change in the overall

economic conditions of both the countries due to any other external factor.

The overall methodological approach that we are going to use in this

assignment will be a single approach of quantitative methods. Since we have

collected the quantitative data of FDIs and GDP of both the countries, we are

going to treat the data quantitatively without making any further distributions.


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Unbiased and proper data gathering is a hectic and difficult task. In order to

ensure data reliability, data is gathered from reliable sources such as

governmental and educational websites like indexmundi, pakboi and worldbank.

A rigorous research over internet was carried to make sure that reliable data is

available to be worked on.

As discussed earlier, the research requires the study of impact of GDP on FDI.

Therefore, only the data of two factors i.e. GDP and FDI is gathered for the last

20 years from 1990 to 2010. It is pertinent to mention here that in order to

ensure the reliability and validity of the data, a confidence level of 99% will be

maintained throughout the analysis. The 99% of confidence level is proposed

due to the main practical considerations that might affect the data gathering

process or analysis.

The analysis of quantitative data will be done with the help of different

statistical tools such as Regression, Correlation, and some graphs like XY

Scatter and stacked lines will help us finding the pattern between the Growth

rate and FDI. MegaStat and Microsoft Excel will be used to perform these

statistical operations on the data in order to analyse it properly.


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DATA ANALYSIS

4.1 Data Analysis of Pakistan:

Following are the data Tables of Pakistans GDP and FDI of the past 20

years i.e. from 1990-2010 and their analysis.

PAKISTAN GDP DATA YEAR-WISE:

YEAR GDP (Current US $)

1990 $40,010,420,000

1991 $45,451,960,000

1992 $48,635,240,000

1993 $51,478,360,0001994 $51,894,800,000

1995 $60,636,070,000

1996 $63,320,170,000

1997 $62,433,340,000

1998 $62,191,960,000

1999 $62,973,850,000

2000 $73,952,380,000

2001 $72,309,740,000

2002 $72,306,820,0002003 $83,244,800,000

2004 $97,977,770,000

2005 $109,600,000,000

2006 $127,500,000,000

2007 $143,171,000,000

2008 $163,892,000,000

2009 $161,819,000,000

2010 $176,870,000,000

Source: http://www.indexmundi.com/facts/pakistan/gdp


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Graphical Representation of the above data including the trend line

The above graph made with the help of GDP data of Pakistan, shows that

the GDP of Pakistan has been increased significantly from 1990. However,

several ups and downs can also be observed in the chart like the decline in GDP

at the time of Kargil war and 2009 Global Financial Crisis.

PAKISTAN FDI DATA YEAR-WISE:

YEAR Foreign direct investment1990 $245,263,000.00

1991 $258,414,500.00

1992 $336,479,900.00

1993 $348,557,000.00

1994 $421,024,600.00

1995 $722,631,600.00

1996 $921,976,200.00

1997 $716,253,100.00

1998 $506,000,000.00

$0

$20,000,000,000

$40,000,000,000

$60,000,000,000

$80,000,000,000

$100,000,000,000

$120,000,000,000

$140,000,000,000

$160,000,000,000

$180,000,000,000

$200,000,000,000

PAKISTAN GDP (Current US $)

GDP (Current US $)

Linear (GDP (Current US $))


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1999 $532,000,000.00

2000 $308,000,000.00

2001 $383,000,000.00

2002 $823,000,000.00

2003 $534,000,000.002004 $1,118,000,000.00

2005 $2,201,000,000.00

2006 $4,273,000,000.00

2007 $5,590,000,000.00

2008 $5,438,000,000.00

2009 $2,338,000,000.00

2010 $2,022,000,000.00

Data Sources:

1) Index Mundi (http://bit.ly/18r2mw6)2) PakBoi (http://bit.ly/ZMCGqB)

Graphical Representation of the above data

The table of Pakistans FDI data shows that there is a drastic increase in

the FDI inflows from 2004 to 2006, whereas on the other hand, this is the period

$0.00

$1,000,000,000.00

$2,000,000,000.00

$3,000,000,000.00

$4,000,000,000.00

$5,000,000,000.00

$6,000,000,000.00

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Pakistan's FDI

Pakistan's FDI


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when the GDP of Pakistan was increasing rapidly. Moreover, at the time of

2009 financial crisis, when the GDP went down, FDI also went down with same

pace. Therefore, it is evident enough to show that there is a relationship between

GDP and FDI. In order to elucidate this more clearly, a unified graph is given

below that would make it easy to compare the trends.

Graph Showing GDP and FDI together for Comparison

The graph above is representing the behavior of FDI with respect to the

GDP. The data of GDP is adjusted by taking the 100th

values of each year GDP

in order to make the graph look more proper and obvious.

REGRESSIONAL ANALYSIS OF THE DATA

Whenever talking about two variables and to analyze the impact of one

variable on the other, we use a proven technique of statistics known as

Regression. Regression is a method that is used to observe the pattern or trend

between two variables. In our case, we are investigating the impact of GDP on

FDI whether there exists some significant impact of GDP on FDIs or not.

Therefore, let us look at the XY scatter of GDP and FDI, whereas GDP is on

$0.00

$1,000,000,000.00

$2,000,000,000.00

$3,000,000,000.00

$4,000,000,000.00

$5,000,000,000.00

$6,000,000,000.00

Foreign direct investment, net

inflows (BoP, current US$)

GDP in Billions


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Horizontal Axis, as it is the independent variable and FDI is on Y Axis as being

dependent on GDP.

Graph showing the Scatters with the regression l ine and its equation on

right

The dependent variable (y) in the above regression graph is FDI, whereas

the independent variable (x) is GDP. The regression analysis of Pakistans Data

shows that the economys FDI is quite sensitive (The responsiveness of FDI to

GDP is high). This can be estimated by the fact that the correlation coefficient

of both variable is 0.80206465 and the value of Rsquare is greater than 0.64.

This shows that in this small economy, there are some factors other than GDP

that has an impact on FDI inflows too. The upward slope shows that there is a

positive relationship between the two factors under consideration.

y = 0.0314x - 1E+09

R = 0.6433

($1,000,000,000.00)

$0.00

$1,000,000,000.00

$2,000,000,000.00

$3,000,000,000.00

$4,000,000,000.00

$5,000,000,000.00

$6,000,000,000.00

$0 $100,000,000,000 $200,000,000,000

FDI & GDP

FDI & GDP

Linear (FDI & GDP)


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4.2 Data Analysis of China:

Following is the data Table of Chinas GDP and FDI of the past 20 years

i.e. from 1990-2010.

CHINA GDP DATA YEAR-WISE:

Year GDP (Current US $)

1990 $356,936,901,184.00

1991 $379,468,656,246.00

1992 $422,660,918,111.00

1993 $440,500,898,965.00

1994 $559,224,707,281.00

1995 $728,007,199,936.00

1996 $856,084,729,312.00

1997 $952,652,693,079.00

1998 $1,019,458,585,326.00

1999 $1,083,277,930,360.00

2000 $1,198,474,934,199.00

2001 $1,324,806,914,358.00

2002 $1,453,827,554,714.00

2003 $1,640,958,732,775.00

2004 $1,931,644,331,142.00

2005 $2,256,902,590,825.00

2006 $2,712,950,886,698.00

2007 $3,494,055,944,791.00

2008 $4,521,827,288,304.00

2009 $4,991,256,406,735.00

2010 $5,930,529,470,799.00

Source: http://data.worldbank.org/indicator/NY.GDP.MKTP.CD?page=4


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Graphical Representation of the above data including the trend line

The above graph made with the help of GDP data of China, shows that

the economy of China has been growing exponentially from 1990. Unlike

Pakistans economy there are no frequent ups and downs in the economy and

the economy is progressing better.

CHINA FDI DATA YEAR-WISE:

Year Foreign Direct Investment

1990 $3,487,000,000.00

1991 $4,366,000,000.00

1992 $11,156,000,000.00

1993 $27,515,000,000.001994 $33,787,000,000.00

1995 $35,849,200,000.00

1996 $40,180,000,000.00

1997 $44,237,000,000.00

1998 $43,751,000,000.00

1999 $38,753,000,000.00

2000 $38,399,300,000.00

2001 $44,241,000,000.00

2002 $49,307,976,629.00

$0.00

$1,000,000,000,000.00

$2,000,000,000,000.00

$3,000,000,000,000.00

$4,000,000,000,000.00

$5,000,000,000,000.00

$6,000,000,000,000.00

$7,000,000,000,000.00

GDP (Current US $)

GDP (Current US $)

Expon. (GDP (Current US $))


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2003 $47,076,718,733.00

2004 $54,936,483,255.00

2005 $104,108,693,870.00

2006 $124,082,035,620.00

2007 $156,249,335,200.002008 $171,534,650,310.00

2009 $131,057,052,870.00

2010 $243,703,434,560.00

Data Source:

http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?page=4

Graphical Representation of the above Data

The above graph represents the increase in the FDIs of China from 1990.

Except from the global financial crises, the FDI inflows of China are always

increasing every year and there are no major ups and downs. Since the Chinese

economy is progressing exponentially, therefore, the FDI inflows are also

increasing every year.

$0.00

$50,000,000,000.00

$100,000,000,000.00

$150,000,000,000.00

$200,000,000,000.00

$250,000,000,000.00

$300,000,000,000.00

Foreign direct investment, net inflows (BoP,

current US$)

Foreign direct investment,

net inflows (BoP, currentUS$)


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REGRESSIONAL ANALYSIS OF THE DATA

Let us look at the XY scatter of FDI and GDP where FDI is a dependent

variable (Y) and GDP is an independent variable (X). The graph below would

be helpful in understanding the relationship and impact of GDP on FDI.

Graph showing the Scatters with the regression l ine and its equation on

right

The above graph shows that there is a strong positive relationship

between GDP and FDI. The correlation coefficient of the above data of China is

0.957835691, which shows a strong positive correlation, whereas the R-Squared

as mentioned in the graph for the linear trend line is 0.9174 which goes to prove

that FDI inflows in the economy of China are highly dependent on its GDP than

any other factor. Since China is a progressing economy with exponential growthrate, the FDI inflows are quite significant and are increasing every year because

of its GDP. The investors find it a fertile ground for their investments and the

stability of economy is attracting more and more investors day by day. This

shows that in an economy like China, no other economic factors cast a greater

impact on FDI than GDP and the upward slope shows that there is a positive

relationship between the two factors under consideration.

y = 0.037x + 2E+09

R = 0.9174

$0.00

$50,000,000,000.00

$100,000,000,000.00

$150,000,000,000.00

$200,000,000,000.00

$250,000,000,000.00

$300,000,000,000.00

$0.00 $5,000,000,000,000.00$10,000,000,000,000.00

FDI (Y) & GDP (X)

FDI (Y) & GDP (X)

Linear (FDI (Y) & GDP (X))


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CONCLUSION

The above analysis has shown that GDP is indeed a major driver of FDIs

in many economies of the world. The analysis and the research that we

conducted in this assignment helps us to conclude this generalize statement that

whether we are considering slow economies or the emerging one, GDP at every

cost casts a great impact on the FDI inflows.

Since GDP is a widely used measure to investigate the economic

conditions of any country, the investors who are interested in investing their

capital into other countries always look at the countrys GDP first. If the

countrys economy is progressing and the GDP growth rate is significant, it

compels the investors to invest in that country.

Same is the case with the countries that we took into consideration.

Although the GDP of Pakistan is increasing, but still the responsiveness of FDI

inflows is not unitary, instead it is less responsive. This goes to show that third

world economies have some other factors too that cast an impact on FDI

inflows and it is not solely dependent on GDP. Whereas, on the other hand, the


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analysis of the data of China shows that in emerging economies which are

progressing better have GDP the only impact caster on the FDI inflows.


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6

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APPENDICES

6.1 References

Arshad, M., & Ali, S., (2011). FDI and Economic Growth in Pakistan: A

Sectorial Analysis.PIDE Working Papers. Vol (67). pp. 6-10

Agrawal, G., & Khan, A., (2011). Impact of FDI on GDP: A Comparative Study

of China and India. International Journal of Business and Management.

Vol (6), 10. pp. 71-79

Abbas & et. al. (2011). Impact of Foreign Direct Investment on Gross Domestic

Product. Global Journal of Management and Business Research. Vol

(11), 8. pp. 35-40

World Development Indicators. (n.d.). FDI Annual. Retrieved from

World Development Indicators (n.d.). GDP Annual (Current US $). Retrieved

from


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6.2 Secondary Sources

1) http://en.wikipedia.org/wiki/Coefficient_of_determination

2) http://www.tradingeconomics.com/

3) http://www.digitallibrary.edu.pk/oaebooks.html

4) http://onlinebooks.library.upenn.edu/

5)http://www.runningromans.com/Academics/Economics/Econ%20Review%20

Notes/Formulas%20and%20Definitions.htm

6) http://quizlet.com/12172179/macroeconomics-formula-sheet-flash-cards/

7)http://www.pakboi.gov.pk/index.php?option=com_content&view=article&id

=180&Itemid=137

8) http://en.wikipedia.org/wiki/Foreign_direct_investment

Documents

Impact of GDP on FDI: Study of empirical Relationship between GDP and FDI