Does FDI Promotes Economic Growth

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Foreign DirectInvestment andeconomic growth:A Case Study of

Pakistan.

Abdul Khaliq


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outline.

Introduction

Literature Review

Data And Methodology

Estimations And Results

Conclusions


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Introduction:

Determining the impact of FDI on Economicgrowth.

Foreign Direct Investment in the form of

technology diffusion.

Absorptive capacities of the host country.

Enhancing Human Capital.

Economic growth and political stability.

Pakistan and FDI.


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Literature Review:

Borensztein et al (1997) FDI has a positiveoverall effect on the Economic Growth howeverthe magnitude is proportional to the level of

Human Capital.Frenkel et al (2004) find that distance between

home and host country play a significant role indetermining the extent of FDI flows.

Cazurra (2008) shows that corruption has anegative impact on FDI because it increases thecosts and uncertainty.


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FDI leads to higher growth rates in thefinancially developed countries as compared tothose which are less financially developed(Alfaro et al 2009).

Saini et al (2010)in their research article showsthat FDI has no direct impact on the economic

growth.Alguacil et al (2010) found that to measure the

impact of FDI on economic growth we have toconsider internal and external macroeconomic

stability as well as the quality of institutions.

Morrissey (2011) shows that FDI varies indifferent regimes.


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Data

The Time Series data is about Pakistan coveringthe period from 1970 to 2010.

Data set is mainly obtained from the sourceWorld Bank WDI data base and State Bank ofPakistan.

Real GDP, Total Secondary Enrollment, PublicInvestment, Foreign direct investment (FDI),

GDP Deflator, Official Exchange Rate and TotalInvestment were obtained from the abovesources.

The data of the variable Human Capital was not

available then it was proxy by total Secondary


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Methodology

The main explanatory variables which were

identified in the various studies include theGDP, Human Capital, Population growth,corruption and Investment. These were takentogether with FDI.

Model

Yt is the dependent variable which is the realGDP.

Xt is the variable showing FDI and EtXt is the

interaction term of FDI and total secondary


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The interaction term of FDI and Human Capitaltaken in the model is to determine the absorptiveeffect of foreign investment through HumanCapital on the real GDP.

Data on the Human Capital is not easily availabletherefore, I proxy the Total Secondary Enrollment

as a Human Capital. It was used by many researchers as (Li and Liu

2005) had taken the secondary enrollment as aproxy for Human Capital.

Model is estimated through a method OrdinaryLeast Square (OLS).


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Estimation and Results:

Dependent Variable: GDP

Method: Least Squares

Date: 12/20/11 Time: 19:21

Sample(adjusted): 1973 2009

Included observations: 37 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

C 2.88E+10 4.89E+09 5.886215 0.0000

FDI 160.7489 32.63940 4.924996 0.0000

ENROLL*FDI -1.22E-05 3.02E-06 -4.020759 0.0003

PUBINVST*FDI -9.50E-09 1.66E-09 -5.738778 0.0000

FDI(-1) 20.70642 5.012944 4.130591 0.0002

R-squared 0.828442 Mean dependent var 5.54E+10

Adjusted R-squared 0.806997 S.D. dependent var 2.77E+10

S.E. of regression 1.21E+10 Akaike info criterion 49.40404

Sum squared resid 4.72E+21 Schwarz criterion 49.62173

Log likelihood -908.9747 F-statistic 38.63146

Durbin-Watson stat 0.953886 Prob(F-statistic) 0.000000


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Ramsey reset test:

Ramsey RESET Test:F-statistic 1.972860 Probability 0.157284

Log likelihood ratio 4.719924 Probability 0.094424

Test Equation:

Dependent Variable: GDP

Method: Least Squares

Date: 12/20/11 Time: 23:46

Sample: 1973 2009

Included observations: 37

Variable Coefficient Std. Error t-Statistic Prob.

C 2.01E+10 2.38E+10 0.844998 0.4050

FDI 121.5447 551.8261 0.220259 0.8272

ENROLL*FDI -7.17E-06 4.03E-05 -0.177727 0.8602

PUBINVST*FDI -8.54E-09 3.40E-08 -0.251014 0.8036

FDI(-1) 24.10747 75.36308 0.319884 0.7513

ESGDP10^2 -4.49E-12 1.73E-11 -0.258904 0.7975

FITTED^2 1.65E-11 2.50E-11 0.659172 0.5150

FITTED^3 -1.37E-22 1.39E-22 -0.985685 0.3324

R-squared 0.911046 Mean dependent var 5.54E+10

Adjusted R-squared 0.889574 S.D. dependent var 2.77E+10

S.E. of regression 9.19E+09 Akaike info criterion 48.90940

Sum squared resid 2.45E+21 Schwarz criterion 49.25771

Log likelihood -896.8240 F-statistic 42.42997

Durbin-Watson stat 1.169827 Prob(F-statistic) 0.000000


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Histogram Normality Test

0

2

4

6

8

-2.0E +10-1.0E +100.00000 1.0E +10 2.0E +10 3.0E +10

S eries : R es iduals

S ample 1973 2009

O bservat ions 37

Mean -1.39E -06Median -2.35E +09

Max imum 2 .58E +10

Minim um -1.88E +10

S td . D ev . 1 .15E +10

S kew ness 0 .451639

K urtos is 2.412971

J arque-B era 1.789128

P robabi l i ty 0.408786


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Cusum and cusum ofsquares test:

-20

-10

0

10

20

80 85 90 95 00 05

CUSUM 5%Significance

-0.4

0.0

0.4

0.8

1.2

1.6

80 85 90 95 00 05

CUSUMof Squares 5%Significance


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Conclusion:

A significant positive impact of FDI on theeconomic growth was seen.

FDI has strong positive impact on the economicgrowth when there is availability of the HumanCapital in the host country.

The coefficient sign of the interaction term ofFDI with enrollment was not according to my

expectations. It was due to the less availability ofthe data.

The host country has to promote financialinstitutions and to setup an exemplary judicial

system in order to catch foreign direct investment.


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Thanks.

Does FDI Promotes Economic Growth

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