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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. 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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  1. Do Host Country Factors Affect The Impact Of Foreign Direct Investment On Economic Growth? Edna Solomon 27 November, 2006 ESDS International Annual Conference 2006

  2. 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?

  3. Outline • Introduction • Model • Data • Results • Conclusion

  4. 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.

  5. Literature Review (FDI & Growth)

  6. Literature Review (FDI, HCFs & Growth)

  7. 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.

  8. 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

  9. 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.

  10. 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:

  11. Data-proxies

  12. Data-proxies Cont

  13. Data: Countries in Sample

  14. 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.

  15. 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.

  16. Results: (LINEAR) T-ratios in parenthesis;Dept var:growth rate of gdp per capita.

  17. Results: (WITH QUADRACTIC TERMS)

  18. 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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