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Econometrics

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Rahul Malik
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15 views

Econometrics

Uploaded by

Rahul Malik
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Economic Growth and FDI in Asia:

A Panel-Data Approach

Submitted To : Ashima Arora Submitted By : P K Antony(On Leave)


Rahul Malik
Rajat Yadav
Ravi Kirti Pal
Ruchika Chauhan
Abstract
This study examines the impact of foreign direct investment on economic growth in
Asian countries. We also examined the nonlinearities associated with foreign direct
investment and exports in the economic growth process of Asian countries under
consideration. We find that both foreign direct investment and exports enhance the
growth process. In addition, labour and capital also play an important role in the
growth of Asian countries. We suggest an export-led growth path particularly at the
initial stage of growth and in the later period, dependence on FDI might be a feasible
option.
Objective
The objective of this paper is to examine the impact of foreign direct investment(FDI) on
economic growth in Asian countries using a panel-data approach .The study also aims to
analyze the nonlinearities associated with FDI and exports in the economic growth process of
the Asian countries under consideration, while considering the roles of labour and capital in
the growth process. The paper suggests an export-led growth path, particularly in the initial
stages of growth, with a potential shift towards dependence on FDI in later periods. The goal
is to contribute to the understanding of the relationship between FDI, exports, and economic
growth in Asian countries.
Y = f(K, L, FDI, X)
where Y denotes the output level (i.e., GDP per capita), K denotes the amount of capital
(which is measured by Gross Capital Formation (GCF) as percentage of GDP), L denotes the
amount of labour (measured by labour force of the country) , FDI denotes Foreign Direct
Investment , and X denotes the exports.
Literature Review and Gap
1. Kaldor (1963) and subsequent studies identify mechanisms and determinants of
economic growth, including FDI's role.

2. FDI influences growth through channels like technology transfer, capital enhancement,
and spillover effects.

3. Research on China, India, Thailand, Sri Lanka, Mexico, Brazil, Argentina, and East
Asian economies reveals varying impacts of FDI on growth.

4. Financial development, human capital, trade openness, and governance also affect the
FDI-growth relationship.

5. Studies emphasize the importance of sector-specific FDI, skilled labor, and institutional
factors.
Literature Review and Gap
We observe that several studies have focused on the case of developing
countries and for the major part, stress that FDI, adjusted to other
determinants, has a significant positive effect on economic growth.
However, none of these studies has analyzed the nonlinearities
associated with FDI that affect the economic growth process of the
host country. Therefore, we have moved ahead in this direction and
have also provided the case of export-led growth or FDI led-growth.
Data and Methodology

1. DATA

• Secondary data
• Period of 12 years from 2010 to 2022
• Data of annual and quarterly frequency
• Sources : IMF, World Economic Outlook
Database, OECD and
UNCTADstat : www.unctad.org.
Data and Methodology
2. Methodology
1. Research Objective: This study aims to investigate the impact of Foreign Direct
Investment (FDI) and exports on the economic advancement of Asian nations. It
explores whether FDI-driven growth or export-driven growth yields superior
outcomes.
2. Production Function Framework: Utilizing a production function framework (Y =
f(K, L)), where output (Y) is determined by capital (K) and labor (L), aligned with
principles of new growth theory by Barro and Sala-i-Martin (1995).
3. Role of Exports: International trade, akin to technology, enhances economic
growth by transforming generalized production into specialized production, thereby
increasing productivity. Exports facilitate efficiency in input allocation and overall
productivity growth.
4. Role of FDI: FDI is crucial for developing nations' integration into the global
economy, bringing capital, technology, and market access. FDI fosters economies of
scale, productivity, and investor confidence, stimulating domestic and foreign
investment, trade, and production.
5. Incorporating FDI and Exports into the Production Function: Expanding the
production function (Y = f(K, L, FDI, X)) to include FDI (FDI) and exports (X) as
additional variables to examine their influence on economic growth.
6. Panel Data Analysis: Employing panel-data analysis, including pooled OLS
regression, panel models with random effects, and panel models with fixed effects,
to account for individual country heterogeneity.
Data and Methodology
2. Methodology

7. Correlation Assessment: The presence of


correlation between unobservable individual effects
of countries and growth determinants is crucial.
8. Hausman Test: Evaluates null hypothesis of no
correlation against alternative hypothesis indicating
correlation.
9. Outcome Interpretation: Non-rejection of null
hypothesis favors random effects model; rejection
favors fixed effects model.
10. Model Selection: Random effects model chosen if
no significant correlation; fixed effects model chosen
if correlation is significant.
Analysis
Analysis
Results of panel data models have been presented in Table 1. From Table 1, it is evident that the results of the Wald test and F-
test are significant at a 1% level of significance in all panel-data models. Therefore, we can conclude that we cannot reject the
null hypothesis that the explanatory variables do not explain (taken as a whole) GDP per capita and hence, the determinants
selected in this study can be considered to be enough of an explanation of the economic growth determinant. Although this is
true, in case of the Hausman test, we reject the null hypothesis of correlation between countries’ unobservable individual
effects and economic growth determinants.

This implies that for our analysis, a random-effect model is more appropriate. However, if we compare the sign and
significance of coefficients associated with the respective variables, we find that results reported in models 1 and 2 are the same
(except the constant term that is significant for the random-effect model, while insignificant for the fixed-effect model).

Both models, i.e. model 1 and model 2, show that FDI, exports and labour force have positive and significant impact on the
economic growth of the panel countries. However, the coefficient of GFCF carries a negative sign but is highly insignificant.
Further, when we examine nonlinearity of FDI by incorporating the square value of FDI and we perform the analysis based on
random-effect and fixed-effect models, we find, from model 3 and 4, the same results in terms of sign and significance of the
coefficients associated with variables in both cases (except the fixed-effect model labour force and constant term are
significant, while in the random-effect model we do not find the same). However, the Hausman test in this case also suggests
that the random-effect model is the preferred way of analysis. So, from the results of model 4, we can say that FDI and its
higher inflow in the group of panel countries, contribute to higher growth.
Analysis
Analysis
In Table 2, the results of the Hausman test show that the random-effect model
is an appropriate test for the analysis. The results of this model are reported
under model 2. It is evident from model 2 that FDI, exports, squared exports
and labour force have positive and significant impact on the economic growth
of the panel countries. It also implies that when we analyse the nonlinearity in
both cases i.e., exports and FDI, we find a significant and positive impact of
exports only on the economic growth of panel countries. This also suggests the
preference of the export-led growth hypothesis against the FDI-led growth
hypothesis in our panel countries.
Conclusion
Further, there are studies that have found that FDI has a negative impact on
economic growth and income distribution. Hence, we suggest an export-led
growth path, particularly at the initial stage of growth, in the later period,
dependence on FDI might be feasible option. This finding can be defended
based on two arguments (see Afzal 2010). First, the exports- promotion
incentives determine a specialization of the economy accompanied by the
scale benefices. Second, the augmented exports may stimulate the country to
import high-value inputs, products and technologies. By consequence, these
elements may have a positive impact on the productive capacity of the
economy.
Thank You

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