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With the increasing liberalization of the economies across the world, considerable attention has been devoted to study the merits and demerits of FDI on host countries. Theorists try to understand FDI through two viewpoints. Literature of FDI focuses on two different models to understand the implications of FDI on host countries. The MacDougall (1960) among others focus on measuring impact of FDI in terms of factor rewards, employment and capital flows to host countries. Hymer (1960) examines the motivations behind the firm’s decision to undertake investments abroad and thus stresses on measuring impact of FDI in terms of the indirect effects it creates like externalities or spillovers. We use the MacDougall approach in seeking to understand the direct impact of FDI on host countries. Thus the primary objective of our study is to measure the impact of FDI on two key parameters viz. Gross Domestic Product (GDP) and Gross Capital Formation (GCF) of the host countries. Using the data from World Investment Report for information on FDI stock and flows into developing world and national statistical databases for data on GDP and GCF, we examine the impact of FDI over GDP and GFCF using statistical tests. We hypothesize that increased FDI increases capital formation and GDP of the host country.
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Does Foreign Direct Investment (FDI) Benefit Host Countries: Uncovering the
Relationship between FDI, GDP and Capital Formation in Host Countries
Prashant KulkarniAsst. Professor, Indian Business Academy,
Bangalore
Anantha Murthy N.K. Asst. Professor, Indian Business Academy,
Bangalore
International Conference on Recent Developments in Economics, Hotel Hans New Delhi, Sep 8-12, 2008
Foreign Direct Investment Net inflows of investment to acquire a
lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor (World Bank)
Critical element in the flow of international capital. Less volatile
Shift towards services sector
International Conference on Recent Developments in Economics, Hotel Hans New Delhi, Sep 8-12, 2008
Objectives
To examine the trends and directions of FDI flows and stock
To understand the implication of FDI on host countries.
To examine the relation between FDI stock and the GDP growth rate of the country.
To gauge the extent of FDI flows in gross fixed capital formation of the country
International Conference on Recent Developments in Economics, Hotel Hans New Delhi, Sep 8-12, 2008
Literature Survey Hymer (1960)
eclectic paradigm of FDI theory by focusing on firm specific advantages
Vernon (1966) concept of product life cycle into theories
international trade to explain the existence of international trade, production and consequently capital flows
Dunning (1981, 1986) Extended the framework of the OLI paradigm to
develop the investment development path (IDP) theory.
International Conference on Recent Developments in Economics, Hotel Hans New Delhi, Sep 8-12, 2008
Contd.. Gastanaga, Nugent, and Pashamova (1998)
Countries with relatively liberalized capital accounts tend to attract more foreign direct investment flows.
Feldstein (2000) Case of risk reduction through free flows in the
international capital by allowing the owners of the capital to diversify their lending and investment
Bosworth and Collins (1999) and Mody and Murshid (2001)
Near unitary correlation between FDI and domestic investment.
International Conference on Recent Developments in Economics, Hotel Hans New Delhi, Sep 8-12, 2008
Methodology We define Growth as a function of
GROWTH= f(LABOUR, OPENNESS, EXCHANGE, CAPITAL, GOVERNMENT, FDI)
Where GROWTH- Real GDP per capita LABOUR- Labour force in the economy OPENNESS- Export + Imports of the economy / 2 EXCHANGE- Exchange rate CAPITAL- GCF as % of GDP GOVERNMENT- Government expenditure as % of GDP FDI- FDI inflows as % of Gross Capital Formation
International Conference on Recent Developments in
Economics, Hotel Hans New Delhi, Sep 8-12, 2008
The regression equation is GROWTH= α +β0 LABOUR+ β1OPENNESS+ β2 EXCHANGE + β3CAPITAL + β4GOVERNMENT + β5FDI + Error
International Conference on Recent Developments in
Economics, Hotel Hans New Delhi, Sep 8-12, 2008
Our analysis used the T-statistic to test our hypothesis.
We also used the co-relation study to understand the relation between GDP and FDI inward stock and also the relation between FDI inflows and Gross Fixed Capital Formation.
We also made use of bar charts and diagrams apart from the normal tools and mean and standard deviation
International Conference on Recent Developments in Economics, Hotel Hans New Delhi, Sep 8-12, 2008
Proposition
H0: There is no Impact of FDI on economic growth
H1: There is an Impact of FDI on economic growth.
We further test it for developed and developing countries separately
International Conference on Recent Developments in Economics, Hotel Hans New Delhi, Sep 8-12, 2008
Data Description
World Investment Reports of 2004 and 2005. (published by United Nations Commission on Trade and Development. )
World Development Indicators World Resources Institute
(earthtrends.wri.org).
International Conference on Recent Developments in
Economics, Hotel Hans New Delhi, Sep 8-12, 2008
Classified the countries into developed and developing countries as per the classification adopted by WDI databases.
The time period of the data is between 1980-2005.
Our sample was initially 85 countries (25 developed and 60 developing). However in some cases, the missing data resulted in a final sample size of 76 countries (25 developed and 51 developing countries).
International Conference on Recent Developments in Economics, Hotel Hans New Delhi, Sep 8-12, 2008
Results of Analysis
-4.000
-2.000
0.000
2.000
4.000
6.000
8.000
10.000
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49
Developing countries
Rea
l g
dp
per
cap
ita
Fitted Values
Residuals
Real gdp pc
International Conference on Recent Developments in Economics, Hotel Hans New Delhi, Sep 8-12, 2008
-2.000
-1.000
0.000
1.000
2.000
3.000
4.000
5.000
1 3 5 7 9 11 13 15 17 19 21 23 25
developed countries
Real
gd
p p
er
cap
ita
Fitted Values
Residuals
Real gdp pc
International Conference on Recent Developments in Economics, Hotel Hans New Delhi, Sep 8-12, 2008
Correlation TableDeveloping countries
Labour
Openness
Exchange Capital Govt FDI
Labour 1.000
Openness
-0.246
1.000
Exchange
0.002 -0.046 1.000
Capital 0.379 0.189 0.023 1.000
Govt -0.092
0.301 -0.218 -0.234 1.000
FDI -0.010
-0.086 -0.1000 0.157 0.005 1.000
Correlation TableDeveloped countries
Labour
Openness
Exchange Capital Govt FDI
Labour 1.000
Openness
-0.060
1.000
Exchange
0.201 0.610 1.000
Capital -0.157
0.347 0.555 1.000
Govt 0.189 -0.093 -0.384 -0.576 1.000
FDI -0.101
0.278 -0.132 -0.058 -0.072 1.000
Correlation TableReal GDP &FDI as %of GCF
Real GDP per capita
FDI
Real GDP per capita
1.000
FDI 0.163 1.000
Real GDP per capita
FDI
Real GDP per capita
1.000
FDI 0.624 1.000
Developed countries Developing countries
International Conference on Recent Developments in Economics, Hotel Hans New Delhi, Sep 8-12, 2008
Multiple correlation and coefficient of
Determination
R R2 Adj R2 S.E
0.6626 0.4390 0.3902 1.4332
Multiple correlation and coefficient of Determination
Developed countries Developing countries
R R2 AdjR2
S.E
0.7546
0.5694
0.5107
1.4807
R R2 AdjR2
S.E
0.6670
0.4449
0.2598
0.6605
Multiple Regression Results
Samples Overall
(F-Value)
Constant
(t-Value)
Labour
(t-value)
Openness
(t-Value)
Exchange
(t-Value)
Capital
(t-Value)
Govt
(t-Value)
FDI
(t-Value)
76 Significant at1% los
Significant at1% los
Significant at10% los
Significant at1% los
Significant at5% los
51(Developing)
Significant at1% los
Significant at1% los
Significant at10% los
Significant at1% los
Significant at10% los
25(Developed)
Significant at10% los
Significant at5% los
International Conference on Recent Developments in Economics, Hotel Hans New Delhi, Sep 8-12, 2008
Inferences and Scope for Future Work
The results of regression on growth provide indicators of FDI influencing the growth. The influence however seems weak in case of
developing countries. Correlation between FDI and growth is
stronger in developed world as compared to developing world
Capital formation does not show any significant relationship with economic growth International Conference on Recent Developments in Economics, Hotel Hans New Delhi, Sep 8-12,
2008
