Do host country factors affect the impact of foreign direct investment on economic growth
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Do Host Country Factors Affect The Impact Of Foreign Direct Investment On Economic Growth?. Edna Solomon 27 November, 2006 ESDS International Annual Conference 2006. Objective. What is the impact of FDI on Economic Growth? Do three host country factors: the level of human capital,

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Do Host Country Factors Affect The Impact Of Foreign Direct Investment On Economic Growth?

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Do host country factors affect the impact of foreign direct investment on economic growth

Do Host Country Factors Affect The Impact Of Foreign Direct Investment On Economic Growth?

Edna Solomon

27 November, 2006

ESDS International Annual Conference 2006


Objective

Objective

  • What is the impact of FDI on Economic Growth?

  • Do three host country factors:

    • the level of human capital,

    • the level of financial development and

    • the level of institutional quality

      affect the impact of FDI on Economic Growth?


Outline

Outline

  • Introduction

  • Model

  • Data

  • Results

  • Conclusion


Motivation volume of fdi inflows

Motivation : Volume of FDI Inflows

Source: Data from IMF’s BOPS(2005) from the ESDS International Databank.

Graph indicates a massive increase in FDI in the last decade alone.


Literature review fdi growth

Literature Review (FDI & Growth)


Literature review fdi hcfs growth

Literature Review (FDI, HCFs & Growth)


My contribution

My Contribution

  • Most studies focus on the interaction between FDI and one HCF.

  • But I shall investigate the impact of human capital, financial development & quality of institutions simultaneously on the FDI/growth relationship..

  • Use of System GMM method of estimation.


Model theoretical

Model-Theoretical

  • The model that I used was adopted from Borenstein et. al. (1998)

  • Use of an EGM with TP driver of growth

  • Mechanism: Increase in variety of capital goods (N) TP growth

  • Yt=AHtkt1-

  • There exists N varieties of kt

  • N= n + n


Model empirical

Model-Empirical

g=c0+c1FDI+c2FDIH+c3H+c4Y0+c5A.

Where g=growth rate of gdp per capita for each decade 1970-79; 1980-89.

FDI=FDI as a ratio to GDP.

H=Human capital.

Y0=Initial GDP per capita.

A=set of other variables that.

affect economic growth.


My empirical model

My Empirical Model

Model 1git=c0+c1FDIit+c2Hit+c3FDIitHit+c4Y0it+c5FINit+c6FDI  FINit + c7IQit +c8FDI  IQit +t+ ui +it.

ui= unobservable individual country specific term eg differences in steady state growth paths among countries.

t=time dummies, proxy global shocks.

it= random error term.

Sample period: 1970 to 2003 in 7 five year intervals:


Data proxies

Data-proxies


Data proxies cont

Data-proxies Cont


Data countries in sample

Data: Countries in Sample


Data challenges

Data: Challenges

  • Collection of data for several countries (83) for several years (35 years).

  • Sources of data.

    • Reliability.

    • Single sources for homogeneity of methodology.

  • ESDS databank helps ease the above problems, and hence is invaluable in macroeconomic research.


System gmm

System GMM

  • System GMM (ABBB estimator) is an estimation technique used in dynamic panel data models:

  • Relatively new as it was created by Arellano and Bover (1995) and Blundell and Bond(1998).

  • Advantages:

    • Estimates do not longer suffer from omitted variable bias caused by the unobserved country specific effects.

    • It is able to control for endogeneity of all the explanatory variables.

    • Useful where the dataset in persistent and the time periods are relatively short.


Results linear

Results: (LINEAR)

T-ratios in parenthesis;Dept var:growth rate of gdp per capita.


Results with quadractic terms

Results: (WITH QUADRACTIC TERMS)


Conclusion

Conclusion

  • The positive impact of FDI on economic growth depends on the level of human capital and financial development of the host country.

  • Human capital affects the relationship between FDI and economic growth in a non linear way.


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