Acc final

8/6/2019 Acc final

http://slidepdf.com/reader/full/acc-final 1/32

1 | P a g e

SYMBIOSIS LAW SCHOOL

RESEARCH PROJECT

ON

³RELATIONSHIP BETWEEN FDI, TRADE AND ECONOMIC

GROWTH´

SUBMITTED TO SYMBIOSIS LAW SCHOOL

NOIDA

FACULTY GUIDE-

SUBMITTED BY-

Dr. PushpaNegi Jatin Kumar

Apoorva Banda

(B.B.A.LL.B, second Semester)

Symbiosis Law School(Off Campus Centre of Symbiosis International University)

Sector- 62, Block-A, Plot No-47/48, Noida-201301U.P.-India Ph: +91 (0) 120 2405061,63.

Fax:0120 2405064, Website: www.symlaw.edu.in

8/6/2019 Acc final


2 | P a g e

DECLARATION

We Jatin Kumar & Apoorva Banda, students of B.B.A.L.L.B 2nd Semester of prestigious institute

symbiosis law school, Noida. We hereby declare that the report titled ³Relationship Between FDI,

Trade, Economic Growth´ is submitted by us. I assure that this synopsis is the result of my own

efforts and that any other institute for the award of any degree or diploma has not submitted it.

Date- 20.6 2011 Jatin Kumar

Apoorva Banda

(B.B.A.LL.B-B)

8/6/2019 Acc final


3 | P a g e

CERTIFICATE

This is to certify that Jatin Kumar& Apoorva Banda student of B.B.A.LL.B, Second Semester of

Symbiosis Law School, Noida have successfully completed their Project report. They have prepared this

report on ³Relationship Between FDI, Trade and Economic Growth´ under my direct supervision

and guidance.

DATE ±

20th

June 2011 Faculty Guide

Dr.Pushpa Negi

8/6/2019 Acc final


4 | P a g e

ACKNOWLEDGEMENT

It is a great pleasure for me to put on records my appreciation and gratitude towards Dr. C.J.

Rawandale, Director for his immense support and encouragement all through the preparation of

this report. I would like to thank my faculty Dr. Pushpa Negi (Project Guide) for her valuable

support and suggestions for the improvement and editing of this project report. Last but not the least, I

would like to thank all the friends and others who directly or indirectly helped me in completing our

project report.

Date-

20th june 2011

8/6/2019 Acc final


5 | P a g e

LIST OF CONTENT

S. No. Topic Pg No.

1 Introduction 6-10

2 Review of Literature 11-17

3 Objectives of the study 18

4 Hypothesis of the study 19

5 Research Methodology 20

6 Result and Discussion 21-28

7 Conclusion 29

8 References 30-32

8/6/2019 Acc final


6 | P a g e

INTRODUCTION

Foreign direct investment (FDI) plays an extraordinary and growing role in global business.

It can provide a firm with new markets and marketing channels, cheaper production facilities,

access to new technology, products, skills and financing. For a host country or the foreign

firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can

provide a strong impetus to economic development. Foreign direct investment, in its classic

definition, is defined as a company from one country making a physical investment into

building a factory in another country. The direct investment in buildings, machinery and

equipment is in contrast with making a portfolio investment, which is considered an indirect

investment. In recent years, given rapid growth and change in global investment patterns, the

definition has been broadened to include the acquisition of a lasting management interest in a

company or enterprise outside the investing firm¶s home country. As such, it may take many

forms, such as a direct acquisition of a foreign firm, construction of a facility, or investment

in a joint venture or strategic alliance with a local firm with attendant input of technology,licensing of intellectual property, In the past decade, FDI has come to play a major role in

the internationalization of business. Reacting to changes in technology, growing liberalization

of the national regulatory framework governing investment in enterprises, and changes in

capital markets profound changes have occurred in the size, scope and methods of FDI. New

information technology systems, decline in global communication costs have made

management of foreign investments far easier than in the past. The sea change in trade and

investment policies and the regulatory environment globally in the past decade, including

trade policy and tariff liberalization, easing of restrictions on foreign investment and

acquisition in many nations, and the deregulation and privitazation of many industries, has

probably been been the most significant catalyst for FDI¶s expanded role.

The most profound effect has been seen in developing countries, where yearly foreign direct

investment flows have increased from an average of less than $10 billion in the 1970¶s to ayearly average of less than $20 billion in the 1980¶s, to explode in the 1990s from

$26.7billion in 1990 to $179 billion in 1998 and $208 bi llion in 1999 and now comprise alarge portion of global FDI.. Driven by mergers and acquisitions and internationalization of

production in a range of industries, FDI into developed countries last year rose to $636 billion, from $481 billion in 1998 . Proponents of foreign investment point out that theexchange of investment flows benefits both the home country (the country from which theinvestment originates) and the host country (the destination of the investment). Opponents of FDI note that multinational conglomerates are able to wield great power over smaller and

weaker economies and can drive out much local competition. The truth lies somewhere inthe middle.

For small and medium sized companies, FDI represents an opportunity to become more

actively involved in international business activities. In the past 15 years, the classic

definition of FDI as noted above has changed considerably. This notion of a change in the

classic definition, however, must be kept in the proper context. Very clearly, over 2/3 of

direct foreign investment is still made in the form of fixtures, machinery, equipment and

8/6/2019 Acc final


7 | P a g e

buildings. Moreover, larger multinational corporations and conglomerates still make the

overwhelming percentage of FDI. But, with the advent of the Internet, the increasing role of

technology, loosening of direct investment restrictions in many markets and decreasing

communication costs means that newer, non-traditional forms of investment will play an

important role in the future. Many governments, especially in industrialized and developed

nations, pay very close attention to foreign direct investment because the investment flowsinto and out of their economies can and does have a significant impact. In the United States,

the Bureau of Economic Analysis, a section of the U.S. Department of Commerce, is

responsible for collecting economic data about the economy including information about

foreign direct investment flows. Monitoring this data is very helpful in trying to determine

the impact of such investments on the overall economy, but is especially helpful in evaluating

industry segments. State and local governments watch closely because they want to track

their foreign investment attraction programs for successful outcomes.

As mentioned above, the overwhelming majority of foreign direct investment is made in theform of fixtures, machinery, equipment and buildings. This investment is achieved or

accomplished mostly via mergers & acquisitions. In the case of traditional manufacturing,this has been the primary mechanism for investment and it has been heretofore veryefficient. Within the past decade, however, there has been a dramatic increase in the number of technology startups and this, together with the rise in prominence of Internet usage, hasfostered increasing changes in foreign investment patterns. Many of these high tech startupsare very small companies that have grown out of research & development projects oftenaffiliated with major universities and with some government sponsorship. Unlike traditionalmanufacturers, many of these companies do not require huge manufacturing plants andimmense warehouses to store inventory. Another factor to consider is the number of companies whose primary product is an intellectual property right such as a software programor a software-based technology or process. Companies such as these can be housed almostanywhere and therefore making a capital investment in them does not require huge outlaysfor fixtures, machinery and plants.

In many cases, large companies still play a dominant role in investment activities in small,

high tech oriented companies. However, unlike in the past, these larger companies are not

necessarily acquiring smaller companies outright. There are several reasons for this, but the

most important one is most likely the risk associated with such high tech ventures. In the

case of mature industries, the products are well defined. The manufacturer usually wants to

get closer to its foreign market or wants to circumvent some trade barrier by making a direct

foreign investment. The major risk here is that you do not sell enough of the product that you

manufactured. However, you have added additional capacity and in the case of multinational

corporations this capacity can be used in a variety of ways.

High tech ventures tend to have longer incubation periods. That is, the product tends torequire significant development time. In the case of software and other intellectual propertytype products, the product is constantly changing even before it hits the marketplace. Thismakes the investment decision more complicated. When you invest in fixtures andmachinery, you know what the real and book value of your investment will be. When youinvest in a high tech venture, there is always an element of uncertainty.

8/6/2019 Acc final


8 | P a g e

Therefore, the expanded role of technology and intellectual property has changed the foreign

direct investment playing field. Companies are still motivated to make foreign investments,

but because of the vagaries of technology investments, they are now finding new vehicles to

accomplish their goals. Consider the following:

Licensing and technology transfer. Licensing and tech transfer have been essential in promoting collaboration between the academic and business communities. Ever since legal

hurdles were removed that allowed universities to hold title to research and development

done in their labs, licensing agreements have helped turned raw technology into finishe

products that are viable in competitive marketplaces. With some help from a variety o

government agencies in the form of grants for R&D as well as other financial assistanc

for such things as incubator programs, once timid college researchers are now stepping out

and becoming cutting edge entrepreneurs. These strategic alliances have had a serious

impact in several high tech industries, including but not limited to: medical and

agricultural biotechnology, computer software engineering, telecommunications, advanced

materials processing, ceramics, thin materials processing, photonics, digital multimedia

production and publishing, optics and imaging and robotics and automation. Industry

clusters are now growing up around the university labs where their derivative technologies

were first discovered and nurtured. Licensing agreements allow companies to take full

advantage of new and exciting technologies while limiting their overall risk to royalty

payments until a particular technology is fully developed and thus ready to put new

products into the manufacturing pipeline.

Reciprocal distribution agreements. Actually, this type of strategic alliance is mor

trade-based, but in a very real sense it does in fact represent a type of direc

investment. Basically, two companies, usually within the same or affiliated industries

agree to act as a national distributor for each other¶s products. The classical example is to be found in the furniture industry. A U.S.-based manufacturer of tables signs a reciprocal

distribution agreement with a Spanish-based manufacturer of chairs. Both companies gain

direct access to the other¶s distribution network without having to pay distributor support

payments and other related expenses found within the distribution channel and neither

company can hurt the other¶s market for its products. Without such an agreement in place,

the Spanish manufacturer might very well have to invest in a national sales office t

coordinate its distributor network, manage warehousing, inventory and shipping as well as

to handle administrative tasks such as accounting, public relations and advertising.

Joint venture and other hybrid strategic alliances . The more traditional joint venture is

bi-lateral, that is it involves two parties who are within the same industry who are

partnering for some strategic a/dvantage. Typical reasons might include a need for access

to proprietary technology that might tip the competitive edge in another competitor¶s

favor, desire to gain access to intellectual capital in the form of ultra-expensive human

resources, access to heretofore closed channels of distribution in key regions of the world.

One very good reason why many joint ventures only involve two parties is the difficulty in

integrating different corporate cultures. With two domestic companies from the same

8/6/2019 Acc final


9 | P a g e

country, it would still be very difficult. However, with two companies from different

cultures, it is almost impossible at times. This is probably why pure joint ventures have a

fairly high failure rate only five years after inception. Joint ventures involving three o

more parties are usually called syndicates and are most often formed for specific project

such as large construction or public works projects that might involve a wide variety o

expertise and resources for successful completion. In some cases, syndicates are actuallyeasier to manage because the project itself sets certain limits on each party and clos

cooperation is not always a prerequisite for ultimate success of the endeavor.

Portfolio investment: For most of the latter part of the 20th century when FDI became an

issue, a company¶s portfolio investments were not considered a direct investment if th

amount of stock and/or capital was not enough to garner a significant voting interes

amongst shareholders or owners. However, two or three companies with "soft"

investments in another company could find some mutual interests and use their

shareholder power effectively for management control. This is another form of strategi

alliance, sometimes called "shadow alliances". So, while most company portfolio

investments do not strictly qualify as a direct foreign investment, there are instances withina certain context that they are in fact a real direct investment.

Why is FDI important for any consideration of going global?

The simple answer is that making a direct foreign investment allows companies to

accomplish several tasks:

Avoiding foreign government pressure for local production.

Circumventing trade barriers, hidden and otherwise.

Making the move from domestic export sales to a locally-based national sales office.

Capability to increase total production capacity.

Opportunities for co-production, joint ventures with local partners, joint marketing

arrangements, licensing, etc;

A more complete response might address the issue of global business partnering in verygeneral terms. While it is nice that many business writers like the expression, ³think

globally, act locally´, this often used cliché does not really mean very much to the average

business executive in a small and medium sized company. The phrase does have significant

connotations for multinational corporations. But for executives in SME¶s, it is still just

another buzzword. The simple explanation for this is the difference in perspective between

executives of multinational corporations and small and medium sized

companies. Multinational corporations are almost always concerned with worldwide

8/6/2019 Acc final


10 | P a g e

manufacturing capacity and proximity to major markets. Small and medium sized companies

tend to be more concerned with selling their products in overseas markets. The advent of the

Internet has ushered in a new and very different mindset that tends to focus more on access

issues. SME¶s in particular are now focusing on access to markets, access to expertise and

most of all access to technology.

Depending on the industry sector and type of business, a foreign direct investment may be anattractive and viable option. With rapid globalization of many industries and verticalintegration rapidly taking place on a global level, at a minimum a firm needs to keep abreastof global trends in their industry. From a competitive standpoint, it is important to be awareof whether a company¶s competitors are expanding into a foreign market and how they aredoing that. At the same time, it also becomes important to monitor how globalization isaffecting domestic clients. Often, it becomes imperative to follow the expansion of keyclients overseas if an active business relationship is to be maintained.

New market access is also another major reason to invest in a foreign country. At some stage,export of product or service reaches a critical mass of amount and cost where foreign

production or location begins to be more cost effective. Any decision on investing is thus acombination of a number of key factors including:

assessment of internal resources,

competitiveness,

market analysis

market expectations.

From an internal resources standpoint, does the firm have senior management support for theinvestment and the internal management and system capabilities to support the set up time aswell as ongoing management of a foreign subsidiary? Has the company conducted extensivemarket research involving both the industry, product and local regulations governing foreigninvestment which will set the broad market parameters for any investment decision? Is there arealistic assessment in place of what resource utilization the investment will entail? Hasinformation on local industry and foreign investment regulations, incentives, profit retention,financing, distribution, and other factors been completely analyzed to determine the mostviable vehicle for entering the market (greenfield, acquisition, merger, joint venture, etc.)?Has a plan been drawn up with reasonable expectations for expansion into the market throughthat local vehicle? If the foreign economy, industry or foreign investment climate ischaracterized by government regulation, have the relevant government agencies been

contacted and concurred? Have political risk and foreign exchange risk been factored into the business plan?

8/6/2019 Acc final


8/6/2019 Acc final


12 | P a g e

findings supported the Bhagwati Hypothesis. The government should emphasize both export promotion policy and inward FDI to get the desired results of economic growth.

Fidrmuc & Martin (2005) researched that Central, Eastern and South-eastern Europe(CESEE) had experienced an export boom as well as a surge in capital inflows up to theoutbreak of the economic and financial crisis, which had a major negative impact on these

two facets of the CESEE growth model. Did the long-term growth prospects of the CESEEcountries deteriorate, too? To answer this question, we estimated the long-run relationshipand tested the causality between capital flows, exports and industrial production. Vector error

correction models showed that exports and the stock of FDI in the CESEE region are positively related to industrial production and thus economic growth. By contrast, portfolio

investment is only weakly related to the region¶s industrial growth performance. Thesefindings implied that the CESEE countries should pursue two objectives: remain attractive

locations for inward FDI and enhance their export prospects

Beradovic, Maria,Hennix and Jeanette(2006):Developing economies have become moreinfluential in the world economy during the two last decades. The opened, dynamicand fastest-growing developing economies are considered to play a major role in a stable

global economy. They attracted foreign direct investments, FDI and experience high traderates. These economies also created opportunities for the rest of the uprising developingregions, through spill over effects and increased regional trade. The purpose of this thesis isto analyse the role of FDI and trade openness in promoting economic growth in Africa andAsia. The contrast in how FDI and openness to trade affect growth rates in these regions in

particular is something that has been left out from previous studies.

.Li, Yong(2003):Within a gravity model framework, this paper investigated the impact of foreign direct investment (FDI) on the trade performance of China using trade and stock dataon a bilateral basis between China and 75 partner countries/regions over the period 1989 to

2000. It has been found that outward FDI had a larger predicted impact on China's exportsthan does inward FDI. On the other hand, inward FDI is found having a larger predictedimpact on China's imports than does outward FDI. The results from regional breakdownanalysis showed that the extent to which FDI is trade-enhancing appears to depend on FDI'smotivation and region-specific characteristics.

XU Jian-jun and WANG Hao-han(2007):Based on the new open situation, this paper usedco integration theory, impulse response function and Granger causality test approach to studythe relationship among FDI, foreign trade and economic growth in Yangtze Delta Area. Theresults show that: (1) whether in the long run or in the short run, FDI and export pusheconomic growth. Although import pushed economic growth in the short run, yet the push

effect of import on economic growth doesn¶t emerge in the long run.(2)There exists distinctdifference between the effect of FDI and foreign trade on growth economic, and the pusheffect of FDI on growth economic is greater than the effect of FDI on foreign trade.(3)Thereexists bi-directional Granger causality between FDI and export both in the long and the shortrun, and import mono-directionally causes economic growth in the short run. At last, somerelevant proposals are put forward.

Gerardo Mendoza Osorio(2008): Trade openness, market size, transparency, ease of doing business, location advantages and low levels of corruption and country risk are the main

8/6/2019 Acc final


13 | P a g e

determinants that attract Foreign Direct Investment into a host country. FDI inflows inMéxico have increased remarkably since 1994 when the North America Free Trade

Agreement (NAFTA) came into effect. Using multiple regression analysis in order tomeasure the impact of FDI on GDP; the Empirical results showed that a one percent increase

in FDI led on average to an increase of 0.08 percent in GDP which clearly reflects a positive but neither an important nor a substantial impact of FDI on economic growth in México as it

would be expected. Time series data analysis for the period 1980-2007 has been tested for Unit Root by applying the Dickey-Fuller (DF) test. Each time series after the first difference

becomes stationary and therefore it might be a causal relationship among the variables.However, FDI will not have a real impact on the society unless there is an effective stock of Human Capital capable of learning and absorbing the know-how to work successfully withthe technology that Multinational Corporations bring into the host country with their investment. The challenge for the Mexican Government is to create structural reforms such asthe deregulation of energy and oil sector for private investment that will lead to constantlyhigher flows of FDI. In the medium term this will then be reflected in the society in terms of

poverty reduction and development of its population.

N. Balamurali and C. Bogahawatte(2004): This paper examined the relationship betweenforeign direct investment and economic growth of Sri Lanka for the period 1977-2003 usingJohansen¶s full information maximum likelihood method by considering relationship betweenreal gross domestic product, foreign direct investment, domestic investment and openness of the trade policy regime. The results indicated that foreign direct investments exerted anindependent influence on economic growth and there is bidirectional causality betweenforeign direct investment and economic growth. The finding suggested that better trade

policy reforms, implementation aimed at promoting foreign direct investment and domesticinvestment, and restoring international competitiveness to expand and diversify the country¶sexports have the potential of accelerating economic growth in the future.

Y.S. Lee(2005): Promotion of foreign direct investment (FDI) and trade liberalization on both global and regional levels has been considered to be beneficial for the economicdevelopment of developing countries. Current WTO rules support regional tradeliberalization and prohibit certain trade-related investment measures by nationalgovernments, even though these are important policy tools for economic development. This

paper critiqued this conventional support of FDI and regional trade liberalization through freetrade agreements, and proposed regulatory changes that will balance the need for investmentmeasures that promote development interests and the call for FDI and trade liberalization.The paper also discussed the impact of the recent proliferation of regional trade agreementson the multilateral trading system in the development context.

Anonymous(2004):Using data from an Arab country, this paper showed that foreign directinvestment (FDI) contributes to higher growth both directly and indirectly through its effectson exports. Knowledge of the positive influence of FDI on growth enabled businesses to havea stronger negotiation position vis-a-vis the host country. Drawing on the findings and themethodology in this paper, business decision-makers enhanced their measurement of expected risks by estimating the effects of increased FDI to the host country. The results alsohighlighted the potential for FDI to contribute to political stability through efficient allocationcorporate resources.

8/6/2019 Acc final


14 | P a g e

Yohane Khamfula(2007):Corruption is understood as an act in which the power of public

office is used for personal gain in a manner that contravenes the rules established by thegoverning structures of a society. This study attempted to offer an extension to the empirical

model employed by Balasubramanyam et al. (1996) by analysing how FDI determineseconomic growth within the new growth theory framework when the degree of corruption is

considered. Thus, the study sought to examine the way in which corruption can have animpact on the economic growth of developing countries whose trade strategies differ (either IS and EP). It suggested that further insight can be gained by considering how corruptionmight interact with the trade policy in affecting economic growth. This is examined usingfixed-effects, simultaneous equation model for 17 countries over the period 1994±2004. Theresults showed that the level of corruption strongly and negatively influences foreign directinvestment in both IS and EP countries. However, when the corruption index is interactedwith domestic investment, the influence on foreign direct investment is positive andsignificant for IS countries only. The most interesting outcome of the study is the effect of theinteraction term between foreign direct investment and the corruption perception index on

economic growth, which is found to be greater in magnitude for the EP countries than for theIS countries.

Baharom, A.H., Habibullah, M.S. and Royfaizal(2008):This study examines the role of trade openness and foreign direct investment in influencing economic growth in Malaysiaduring 1975-2005, using the Bounds testing approach suggested by Pesaran et al. (2001). Theempirical results demonstrated that trade openness is positively associated and statisticallysignificant determinant of growth, both in short run and the long run. The result alsosuggested that foreign direct investment is positively associated in the short run andnegatively associated in the long run, both significantly. Besides these two variables, theother control variable namely exchange rate is also significant in the short run as well as inthe long run.

Sajid Anwar and Lan Phi Nguyen(2010):By making use of a gravity model, this paper examined the impact of FDI on exports, imports and net export of Vietnam. The empiricalanalysis presented in this paper is based on a recently released panel dataset involvingVietnam's 19 major trading partners for the period 1990±2007. The paper also considered theimpact of FDI on trade during three sub-periods: the pre-Asian financial crisis, the post-Asianfinancial crisis and during the Asian financial crisis period. The empirical analysis revealedthat a complementary relationship exists between FDI and exports and FDI and imports.While the impact of FDI on net-exports is insignificant during the full sample period, asignificant positive relationship exists between net-exports and FDI in the post-Asian

financial crisis period.

Usman Yousaf and Adnan Haider(2010):FDI is considered as the important source of funding in Pakistan. It is taken as one of the important pillars on which an economy stands; ittransferred technology, labour and management skills and superior industrial baseinfrastructure from home country to host count. But two see the advancement in the economydue to FDI one should understand the absorption capacity of the economy itself. The factorslike level of employed labour force, domestic capital, balance of trade should support

8/6/2019 Acc final


15 | P a g e

economy for better response to foreign funding. This study indicated, whether FDI helps theeconomy of Pakistan to grow or not. For this purpose analysis is done on the data from World

Bank indicators for the period of 1980-2009. Production function is used to theorize theanalysis and OLS model is used for the empirical representation of the study.

Yongkul Won and Frank S. T. Hsiao(2006); Using panel data from 1981 to 2005, this paper examined the Granger causality relations among GDP, exports and FDI in the threefirst generation Asian newly industrializing economies (ANIEs): Korea, Taiwan, Singapore,and in the four second generation ANIEs: Malaysia, Philippines and Thailand, in addition toChina. After reviewing the current literature, we constructed three-variable panel VAR models for the first generation ANIEs, the second generation ANIEs, and finally, all seveneconomies as a group. We then used the fixed effects model to estimate the panel VAR equations for Granger causality tests. The panel data causality results revealed that there are

bidirectional causality relations among all three variables for the three first generationANIEs, but only statistically weak bidirectional causality between exports and GDP for the

four second generation ANIEs. However, when all seven ANIEs are grouped for panel dataanalysis, we found FDI has unidirectional effects on GDP directly and also indirectly throughexports, exports also cause GDP, and there also exists bidirectional causality between exportsand GDP for the group. Economic and policy implications of our analyses are then exploredin the conclusions.

Maria Carkovic and Ross Levine(2002):This paper used new statistical techniques and twonew databases to reassess the relationship between economic growth and FDI. After resolving biases plaguing past work, we found that the exogenous component of FDI does notexert a robust, independent influence on growth.

Ismail AKTAR, Latif OZTURK and Nedret DEMIRCI(2008):The impact of ForeignDirect Investment, export, economic growth and total fixed investment on unemployment inTurkey for the period of 1987-2007 was examined. Johansen co integration technique wasapplied to determine long run relationship. The empirical findings suggest that there are twocointegrating vectors during the concerned period of time in Turkey.

Ahmad Jafari Samimi, Zeinab Rezanejad, Faezeh Ariani (2010):This paper used annualaggregate data for 16 countries in Organization of Islamic Conference (OIC) for the period

2000-2006 to determine the impact of foreign direct investment (FDI) on growth. The OICcountries are classified based on 4 geographical groups of region (Africa, Asia, Middle East

and Western Hemisphere). We have used panel regression analysis and empirical result

support that a FDI and openness has a positive impact on growth into the OIC countries. Inaddition study finds FDI caused GDP growth in these countries. These suggest that FDI hasindirect effect on economic growth in OIC.

Adil Khan Miankhel and Kaliappa Kalirajan(2009):The paper adopts a time series

framework of the Vector Error Correction Models (VECM) to study the dynamic relationship between export, FDI and GDP for six emerging countries of Chile, India, Mexico, Malaysia,Pakistan and Thailand. Stationary of the series with structural breaks is also examined in the

8/6/2019 Acc final


16 | P a g e

model. Given that these countries are at different stages of growth, we will be able to identifythe impact of FDI and export on economic growth at different stages of growth. The results

suggest that in South Asia, there is evidence of an export led growth hypothesis. However, inthe long run, we identify GDP growth as the common factor that drives growth in other

variables such as exports in the case of Pakistan and FDI in the case of India. The LatinAmerican countries of Mexico and Chile show a different relationship in the short run but in

the long run, exports affect the growth of FDI and output. In the case of East Asian countries,we find bi-directional long run relationship among exports, FDI and GDP in Malaysia, whilewe find a long run uni-directional relationship from GDP to export in case of Thailand.

P.P.A Wasantha Athukorala(2003):The integration of developing countries with the globaleconomy increased sharply in the 1990s with changing in their economic policies andlowering of barriers to trade and investment. Foreign Direct Investment (FDI) is assumed to

benefit a poor country like Sri Lanka, not only by supplementing domestic investment, butalso in terms of employment creation, transfer of technology, increased domestic competition

and other positive externalities. Sri Lanka offers attractive investment opportunities for foreign companies and has adopted a number of policies to attract foreign direct investment

into the country and the country seems to offer perhaps one of the most liberal FDI regimesin South Asia. As a result, during the last decade FDI inflows in Sri Lanka has increased

considerably by 8.5 in 1990 to 15.0 in 2000 as a percentage of GDP while Indian experiencewas 0.5 to 4.1 in the same period However, previous literature suggests that the FDI inflows

have a positive impact on economic growth of host countries. Although a large volume of econometric literature comprises on the impacts of FDI on economic growth in developing

countries, there is not enough studies on the question of causality linkage between them. This paper focuses on the FDI-led growth hypothesis in the case of Sri Lanka. The study is basedon time series data from 1959 to 2002 and the response of civil society and foreign firms.The econometric framework of cointegration and error correction mechanism were used tocapture two way linkages between variables interest. It is evident in the results that theregression analysis do not provide much support for the view of a robust link between FDIand growth in Sri Lanka. It does not imply that FDI is unimportant. Rather, its analysisreduces the confidence in the belief that FDI has exerted an independent growth effect in SriLanka. But net attitudes of the civil society on the impact of FDI on opportunities for domestic business and economic activities is positive and net attitudes of foreign firmstoward FDI reveals that the investment climate has not improved in Sri Lanka as a result of lack of good governance, corruption, political instability and disturbance, bureaucratic inertia,and poor low and order situation.

Nikolai Flexner(2000);This paper employs ordinary least squares (OLS) estimation toexamine the determinants of foreign direct investment (FDI) and the effect of FDI on per

capita GDP growth in Bolivia over the period 1990:1-1998:4. The regression results find thatthe real effective multilateral exchange rate, the ratio of external debt to GDP, and a dummyrepresenting capitalization inflows significantly impact FDI, while FDI, along with the terms-

of-trade, the ratio of private sector credit to GDP, and the ratio of government spending toGDP are shown to have a statistically significant impact on per capita GDP growth. Theexclusion of capitalization inflows from total FDI in the FDI determinants model has verylittle impact on the overall results. Additional sections of the paper examine FDI in historicalcontext and the composition of FDI by breaking down FDI flows by sector and country of origin. Historically, FDI inflows have been concentrated in the hydrocarbon and mining

8/6/2019 Acc final


17 | P a g e

sectors. However, inflows to these and other sectors were low when compared to other countries in the region, likely in response to political and economic stability. In recent years

FDI in the mining sector has declined, while FDI in the hydrocarbon and service sectors hassurged to unprecedented levels. These two sectors received 80.4 percent of all FDI over the

period 1990-98. Finally, the United States continues to be the principal source of FDI inBolivia. Over the 1990-98 period FDI originating in the United States represented 40.7

percent of all FDI in Bolivia. Other important sources of FDI in the 1990s have been theSouthern Cone countries of Argentina, Brazil, and Chile, and increasingly Europe due to the

participation of a number of European companies in the capitalization process.

Hiranya K Nath(2008):Using a fixed effects panel data approach, this paper empiricallyexamines the effects of trade and foreign direct investment (FDI) on growth of per capita realGDP in 13 transition economies of Central and Eastern Europe, and the Baltic region from1991 to 2005. A significant positive effect of trade on growth is a robust result for transitioneconomies of this region. In addition, domestic investment appears to be an important

determinant of growth. In general, FDI does not have any significant impact on growth inthese transition economies. However, when we control for the effects of domestic investment

and trade on FDI, it appears to be a significant determinant of growth for the period after 1995.

Mete Feridun and Yaya Sissoko(2004):This study examines the relationship betweeneconomic growth as measured by GDP per capita and foreign direct investment for

Singapore, using the methodology of Granger causality and vector auto regression (VAR).Evidence shows that there is a unidirectional Granger causation from foreign directinvestment to economic growth.

Abdul Khaliq and Ilan Noy(2007):The paper investigated the impact of foreign direct

investment (FDI) on economic growth using detailed sectoral data for FDI inflows toIndonesia over the period 1997-2006. In the aggregate level, FDI is observed to have a

positive effect on economic growth. However, when accounting for the different averagegrowth performance across sectors, the beneficial impact of FDI is no longer apparent. Whenexamining different impacts across sectors, estimation results show that the composition of FDI matters for its effect on economic growth with very few sectors showing positive impactof FDI and one sector even showing a robust negative impact of FDI inflows (mining andquarrying). The sectors examined are: farm food crops, livestock product, forestry, fishery,mining and quarrying, non-oil and gas industry, electricity, gas and water, construction, retailand wholesale trade, hotels and restaurant, transport and communications, and other privateand services sectors.

8/6/2019 Acc final


18 | P a g e

OBJECTIVES OF THE STUDY

1. To find out the relationship between FDI, Economic growth and Trade of India2. To find out the relationship between FDI, Economic growth and Trade of China3. To find out the relationship between FDI, Economic growth and Trade of Brazil4. To find out the relationship between FDI, Economic growth and Trade of Korea5. To find out the relationship between FDI, Economic growth and Trade of Argentina6. To find out the relationship between FDI, Economic growth and Trade of Chile7. To find out the relationship between FDI, Economic growth and Trade of Pakistan8. To find out the relationship between FDI, Economic growth and Trade of Iran9. To find out the relationship between FDI, Economic growth and Trade of Indonesia10. To find out the relationship between FDI, Economic growth and Trade of Malaysia11. To find out the relationship between FDI, Economic growth and Trade of Cuba12. To find out the relationship between FDI, Economic growth and Trade of Singapore13. To find out the relationship between FDI, Economic growth and Trade of Thailand

14. To find out the relationship between FDI, Economic growth and Trade of Turkey15. To find out the relationship between FDI, Economic growth and Trade of SaudiArabia

8/6/2019 Acc final


19 | P a g e

HYPOTHESIS OF THE STUDY

Ho1= There is no relationship between FDI, Economic Growth and Trade of IndiaHo2= There is no relationship between FDI, Economic Growth and Trade of ChinaHo3= There is no relationship between FDI, Economic Growth and Trade of BrazilHo4= There is no relationship between FDI, Economic Growth and Trade of KoreaHo5= There is no relationship between FDI, Economic Growth and Trade of ArgentinaHo6= There is no relationship between FDI, Economic Growth and Trade of ChileHo7= There is no relationship between FDI, Economic Growth and Trade of PakistanHo8= There is no relationship between FDI, Economic Growth and Trade of IranHo9= There is no relationship between FDI, Economic Growth and Trade of IndonesiaHo10= There is no relationship between FDI, Economic Growth and Trade of Malaysia

Ho11= There is no relationship between FDI, Economic Growth and Trade of CubaHo12= There is no relationship between FDI, Economic Growth and Trade of SingaporeHo13= There is no relationship between FDI, Economic Growth and Trade of ThailandHo14= There is no relationship between FDI, Economic Growth and Trade of TurkeyHo15= There is no relationship between FDI, Economic Growth and Trade of Saudi Arabia

8/6/2019 Acc final


20 | P a g e

RESEARCH METHODOLOGY

1. The study

The study was empirical in nature.

2. Sampling Design

2.1 Population

The total population was of all the countries of developing countries .

.

2.2 Sampling Element

The sampling element was FDI and GDP of Individual Countries.

2.3 Sampling Technique

Purposive sampling techniques were applied.

2.4 Sampling Size

The sample size of the study was 15 developing countries

3. Tools for Data collection

The Secondary data was collected from websites uncstad.org.

4. Tools for Data Analysis

1) To measure the relationship between FDI, Economic Growth and Trade.

8/6/2019 Acc final


21 | P a g e

RESULT AND DISCUSSION

India

China

-5000

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 2 1 2 3 2 5 2 7 2 9 31 33 35 37 39

GDP

FDI

-20000

0

20000

40000

60000

80000

100000

120000

1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 2 1 2 3 2 5 2 7 2 9 3 1 33 35 37 39

GDP

FDI

8/6/2019 Acc final


22 | P a g e

Brazil

Korea

-5000

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 2 1 2 3 2 5 2 7 2 9 3 1 3 3 3 5 37 39 41

GDP

FDI

-2000

0

2000

4000

6000

8000

10000

12000

1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 2 1 2 3 2 5 2 7 2 9 3 1 3 3 3 5 37 39 41

GDP

FDI

8/6/2019 Acc final


23 | P a g e

Argentina

Chile

-5000

0

5000

10000

15000

20000

25000

30000

1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 2 1 2 3 2 5 2 7 2 9 3 1 3 3 3 5 37 39 41

GDP

FDI

-2000

0

2000

4000

6000

8000

10000

12000

14000

16000

1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 2 1 2 3 2 5 2 7 2 9 3 1 3 3 3 5 3 7 3 9 4 1

GDP

FDI

8/6/2019 Acc final


24 | P a g e

Pakistan

Iran

-1000

0

1000

2000

3000

4000

5000

6000

1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 2 1 2 3 2 5 2 7 2 9 3 1 3 3 3 5 37 39 4 1

GDP

FDI

-1000

0

1000

2000

3000

4000

5000

6000

1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 2 1 2 3 2 5 2 7 2 9 3 1 3 3 3 5 37 39 4 1

GDP

FDI

8/6/2019 Acc final


25 | P a g e

Indonesia

Malaysia

-6000

-4000

-2000

0

2000

4000

6000

8000

10000

12000

1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 2 1 2 3 2 5 2 7 2 9 3 1 3 3 3 5 37 39 41

GDP

FDI

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 2 1 2 3 2 5 27 2 9 3 1 33 3 5 3 7 3 9 4 1

GDP

FDI

8/6/2019 Acc final


26 | P a g e

Cuba

Singapore

-1000

0

1000

2000

3000

4000

5000

6000

1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 2 1 2 3 2 5 2 7 2 9 3 1 3 3 3 5 37 39 4 1

GDP

FDI

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 2 1 2 3 2 5 2 7 2 9 3 1 3 3 3 5 37 39 41

GDP

FDI

8/6/2019 Acc final


27 | P a g e

Thailand

Turkey

0

2000

4000

6000

8000

10000

12000

1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 2 1 2 3 2 5 2 7 2 9 3 1 3 3 3 5 3 7 3 9 4 1

GDP

FDI

0

5000

10000

15000

20000

25000

1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 2 1 2 3 2 5 2 7 2 9 3 1 3 3 3 5 37 39 41

GDP

FDI

8/6/2019 Acc final


28 | P a g e

Saudi Arabia

The graphical representation of comparison of the GDP and FDI of sample 15 countriesshows different picture altogether. In countries like India, China, Brazil and Korea, GDPtends to maintain consistency in spite of high amount of FDI. This might be because of thefact that, these economies being so large and self sustained, do not get highly affected byFDI. While on the other hand, economies like Chile, Iran, Malaysia and Saudi Arabia showhigh volatility in their respective GDPs in case of high amount of FDI.

-10000

-5000

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41

GDP

FDI

8/6/2019 Acc final


29 | P a g e

CONCLUSION

FDI is an important vehicle of technology transfer from developed countries to developing

countries. Thus FDI and trade have a positive impact on the economic growth of various

countries, however the impact may differ, depending upon the human capital, domestic

investment, infrastructure and trade policies. International trade is also referred to as the

instrument for economic growth. FDI is considered to be an important source of human

capital and technological diffusion. FDI encourages the incorporation of new inputs and

technologies in the production system of host countries. The growth enhancing effects of FDI

are stronger in countries that pursued a policy of export promotion rather than import

substitution. FDI thus is the driving force in the growth process of any country. Hence itcontributes more to economic growth than domestic investments. Over the past two decades,

many countries around the world have experienced substantial growth in their economies,

with even faster growth in international transactions, especially in the form of foreign direct

investment (FDI). The share of net FDI in world GDP has grown five-fold through the

eighties and the nineties, making the causes and consequences of FDI and economic growth a

subject of ever-growing interest. This paper attempts to make a contribution in this context,

by analyzing the existence and nature of causalities, if any, between FDI and economic

growth. It uses as its focal point the South and Southeast Asian region, where growth of

economic activities and FDI has been one of the most pronounced.

Further more, the comparative study between various developing countries such as India,

China ,Brazil and Korea wherein there is a consistency in the GDP, shows that the high

contribution of FDI doesn¶t necessarily affect the growth process of a country. The same has

been represented by graphical representation above. However on the contrary, in countries

like Argentina, Chile, Iran, Pakistan , Singapore and Saudi Arabia, even though GDP isn¶t

consistent, still there is hardly any effect of FDI.

8/6/2019 Acc final


30 | P a g e

REFERENCES

y Dhakal and Rahman. (2005) ³Foreign Direct Investment and Economic Growth inAsia´ retrieved on 24th April, 2011 fromhttp://www.ijeb.com/Issues/data/June07_2_FDIandEconomicGrowth.doc

y Laura Alfaro.(2003) ³Foreign Direct Investment and Growth: Does the Sector Matter?´ retrieved on 27th April,2011 from

http://www.people.hbs.edu/lalfaro/fdisectorial.pdf

y N. Balamurali and C. Bogahawatte (2004) ³Foreign Direct Investment andEconomic Growth in Sri Lanka´ retrieved on 2

ndof May,2011 from

http://www.slageconr.net/sjae/sjae61f/ajae06103.pdf

y P.P.A Wasantha Athukorala.(2003) ³The Impact of Foreign Direct Investment for Economic Growth: A Case Study in Sri Lanka´ retrieved on 5th May, 2011 fromhttp://www.freewebs.com/slageconr/9thicslsflpprs/fullp092.pdf

y Adil Khan Miankhel, Shandre Mugan Thangavelu and Kal iappa Kalirajan

(2009) ³Foreign Direct Investment, Exports, and Economic Growth in SelectedEmerging Countries: Multivariate VAR Analysis´ retrieved on 8th May, 2011 from

https://editorialexpress.com/cgi-

bin/conference/download.cgi?db_name=ACE09&paper

y Ahmad Jafari Samimi, Zeinab Rezanejad, and Faezeh Ariani (2005) ³ Growth andFDI in OIC Countries´ retrieed on 10th May, 2011 from

http://www.insipub.com/ajbas/2010/4883-4885.pdf

y Ismail AKTAR, Latif OZTURK And Nedret DEMIRCI (2008) ³The Impact of FDI, Export, Economic Growth, Total Fixed Investment on Unemployment inTurkey´ retrieved on 10th March,2011 from http://ces.epoka.edu.al/icme/5.pdf

y Maria Carkovic and Ross Levine (2002) ³Does Foreign Direct InvestmentAccelerate Economic Growth?´ retrieved on 12th May, 2011 fromhttp://siteresources.worldbank.org/INTFR/Resources/fdi.pdf

y Yongkul Won and Frank S. T. Hsiao (2006) ³Panel Causality Analysis on FDI ² Exports - Economic Growth Nexus in First and Second Generation ANIEs´ retrieved

8/6/2019 Acc final


31 | P a g e

on 13th

May, 2011 fromhttp://www.akes.or.kr/akes/downfile/3.%20AfterProofreading-

JKE(Yongkul_Won).pdf

y Baharom, A.H., Habibullah, M.S. and Royfaizal, R. C (2008) ³Munich Personal

RePEc Archive : The relationship between trade openness, foreign direct investmentand growth: Case of Malaysia´ retrieved on 13th May, 2011 from

http://mpra.ub.uni-muenchen.de/11928/1/MPRA_paper_11928.pdf

y Usman Yousaf, Adeel Nasir, Farah Naz Naqvi, Adnan Haider and Nadeem AyubBhutta.(2010) ³Impact of Foreign Direct Investment on Economic Growth of Pakistan´ retrieved on 14th May, 2011 fromhttp://www.eurojournals.com/EJEFAS_32_08.pdf

y Mete Feridum. (2004) ³Impact of FDI on Economic Development: A CausalityAnalysis for Singapore, 1976-2002´ retrieved on 14th May, 2011 from

http://www.gcbe.us/6th_GCBE/data/Impact%20of%20FDI%20on%20Economic

%20

y Nikolai Flexner.(2000) ³Foreign Direct Investment and Economic Growth inBolivia, 1990-1998´ retrieved on 15th May, 2011 from

http://zunia.org/uploads/media/knowledge/0309009.pdf

y Abdul Khaliq and Ilan Noy (2007) ³Foreign Direct Investment and Economic

Growth: Empirical Evidence from Sectoral Data in Indonesia´ retrieved on 15th

May,2011 from http://www.economics.hawaii.edu/research/workingpapers/WP_07-

26.pdf

y Jarko Fidrmuc and Reiner Martin. (2005) ³FDI, Trade and Growth in CESEECountries´ retrieved on 15

thMay, 2011 from

http://www.oenb.at/en/img/feei_2011_q1_studies_04_tcm16-224906.pdf

y Authored by Beradovic, Maria,Hennix, Jeanette (2006) ³The Role of FDI andOpenness to Trade in Economic Growth: A study of Africa and Asia´ retrieved on

16th

May, 2011 from http://hj.diva-portal.org/smash/get/diva2:174582/FULLTEXT02

y Li Yong.(2003) ³The impact of FDI on trade: evidence from China's bilateral trade.´Retrieved on 16th May, 2011 from

http://www.freepatentsonline.com/article/Journal-Academy-Business-

Economics/113563595.html

8/6/2019 Acc final


y Yohane Khamfula.(2007) ³Foreign Direct Investment and Economic Growth in EPand IS Countries: The Role of Corruption´ retrieved on 18th May, 2011 from

http://onlinelibrary.wiley.com/doi/10.1111/j.1467-9701.2007.01055.x/pdf

y Anonymous. (2004) ³Does FDI contribute to economic growth? Knowledge aboutthe effects of FDI improves negotiating positions and reduces risk for firmsinvesting in developing countries.´ Retrieved on 19th May,2011 from

http://goliath.ecnext.com/coms2/page_subscribe_research

y Y.S. Lee (2005) ³Foreign Direct Investment and Regional Trade Liberalization: AViable Answer for Economic Development?´ retrieved from 19th May, 2011 from

http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=459873

y Gerardo Mendoza Osorio (2008). ³Foreign Direct Investment and EconomicGrowth in México : An Empirical Analysis´ retrieved on 20

thMay,2011 from

http://urn.kb.se/resolve?urn=urn:nbn:se:his:diva-2479

y XU Jian-jun WANG Hao-han (2007) ³A Study on the Relationship Among FDI,

Foreign Trade, Economic Growth in Yangtse Delta Area under the New OpenSituation´ retrieved on 20

thMay, 2011 from

http://epub.cnki.net/grid2008/docdown/docdownload.aspx?filename=GJMW200

708006&dbcode=CJFD&year=2007&dflag=pdfdown

Acc final

Documents

Transcript of Acc final