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Review of Economics & Finance Submitted on 12/October/2011
Article ID: 1923-7529-2012-01-84-13 Nabila Asghar, Samia Nasreen and Hafeez ur Rehman
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Relationship between FDI and Economic Growth in
Selected Asian Countries: A Panel Data Analysis
Dr. Nabila Asghar
Department of Economics, GC University, Faisalabad, PAKISTAN
Cell: +300-4720706, E-mail: [email protected]
Dr. Samia Nasreen
Department of Economics, GC University, Faisalabad, PAKISTAN
Cell: +305-4023992, E-mail: [email protected]
Prof. Dr. Hafeez ur Rehman (Corresponding author)
Department of Economics, University of the Punjab, Lahore-54590, PAKISTAN
Tel: +92-42-99231167 Ext. 115, Cell: +300-4348225, E-mail: [email protected]
Abstract: This study examines empirically the relationship between FDI and economic growth
using heterogeneous panel for the period 1983-2008. The empirical findings of Larsson panel co-
integration show that FDI and economic growth are cointegrated. FMOLS results reveal that FDI
and economic growth are positively related to each other. The results of panel homogeneous
causality hypothesis show the existence of bi-directional causality between FDI and economic
growth while the results of panel homogeneous non-causality hypothesis confirm the existence of
unidirectional causality running from FDI to economic growth in selected panel. The results of
heterogeneous causality hypothesis show the existence of bi-directional causality between FDI and
economic growth only in case of Malaysia. The existence of uni-directional causality running from
FDI to economic growth is observed in cases of Nepal, Singapore, Japan and Thailand whereas the
uni-directional causality is also found running from economic growth to FDI for Pakistan,
Bangladesh and Sri Lanka. However, no causality in any direction is found in cases of India,
Maldives, Indonesia, China, Philippines, Korea Dem and Singapore.
JEL Classifications: C33, F21, F43, N25
Keywords: FDI, Economic growth, Panel data, Cointegration, Asian countries
1. Introduction
In recent years the growth of FDI has served as a catalyst for investment in developing
countries. FDI brings the most needed capital, improved managerial skills, modern marketing
techniques, access to modern technology and global links. Since 1980 both developed and
developing countries have been trying to attract FDI through providing incentives by adopting
greater deregulation policies and reliance on market forces in the economies. Motive of earning
high profit is the main contributing factor that induces firms to invest abroad particularly in those
countries where labour cost is relatively low. Literature reveals that the foreign firms initially face
high investment cost particularly in those countries whose market and institutional conditions are
not familiar to them. However, economic theories suggest number of explanatory variables that
explain why foreign firms invest abroad in the presence of these disadvantages. These theories are
identified as market imperfection hypothesis, internationalization theory and Ownership, Location
and Internalization (OLI) theory as an eclectic approach. Market imperfection hypothesis postulates
that FDI is the direct result of an imperfect global market environment. (For details, refer
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Kindleberger, 1969; Hymer, 1972; Horagochi and Toyne, 1990). The Internationalization theory
stresses that in countries FDI takes place because multinationals replace external markets with more
efficient internal one. (For details, see Rugman, 1985, 1986). The eclectic approach points out that
FDI emerges because of Ownership, Internalization and Location advantages.1 In this regard
Dunning (1977) states that firms want to invest in those countries where resulting benefits are much
greater than the possibility of disadvantages of operating in foreign countries. Furthermore,
researchers and policy makers have pointed out that the presence of foreign firms help in expanding
infra structure facilities.
Empirically a lot of controversy has been observed on the relationship between FDI and
Economic Growth as most of the studies either provide mixed results or fail to reach at any definite
conclusion (see, for example, Borenzstein et al., 1998; Charkovich and Levine, 2002). Various
empirical studies highlight a significant role of inward FDI in economic growth of the developing
countries, through its contribution in human resource, capital formation, enhanced organization and
managerial skills, transfer of technologies. (For details, see Barro, 1990; Zhang, 2001; Aitkin and
Harrison, 1999; Markusen and Venables, 1999; Blomstrom et al., 1994). But still existing empirical
evidence on FDI and economic growth nexus is inconclusive and for academicians and policy
makers it has become a basis for analyzing this nexus further by using recent advances in dynamic
modeling. The present study is an attempt to analyze the causal relationship between FDI and
economic growth in selected Asian countries using panel data. The main objective of this study is to
test the direction of causality between FDI and economic growth in selected Asian countries using
panel data analysis. This study is different from previous studies in two ways. Firstly, it employs
Larsson et al. (2001) panel cointegration test for heterogeneous panel and panel FMOLS by Pedroni
(2001) to determine the long-run relationship between the variables. Secondly, it uses panel
causality test of Hurlin and Venet (2001) which gives more accurate results as compared to
traditional Granger causality test.
This study is organized as follows. Section II describes review of previous studies; section III
presents methodology and data sources; section IV provides empirical results and their
interpretation; while the last section concludes.
2. Literature Review
The existing literature stresses on the link of FDI and economic environment of the host
country and points out that economic environment is influenced by the development strategies and
policies followed by the host country. Furthermore, some studies conclude that the causal link
between FDI and economic growth depends upon the characteristics of the host countries such as
human capital, market size, availability of technology (for details see Barro, 1990; Zhang, 2001;
Blonigan and Wang, 2005).
In the past decade, several studies have been conducted by the researchers for investigating the
crucial relationship between FDI and economic growth. These studies have employed recent
econometric techniques including GMM, Random Effect and Fixed Effect models for estimation
using cross-section and panel data of various developed and developing countries of the world. A
review of these studies has provided mixed evidence on the relationship between FDI and economic
growth (for details, see Wijaweera, 2007; Zhang, 2001; Johnson, 2006).
1 OLI theory presented by Dunning (2001) analyzes pre-requisites for FDI to take place and asserts that a firm should have firm-specific advantages (ownership), a location advantage to mobilize this firm specific know how (location) and an incentive to internalize external transaction (internalization).
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Balasubramanyam et al. (1996) uses cross sectional data for 46 countries for the period 1970-
85 for analyzing the relationship between FDI and economic growth. Their results show that FDI
has positive impact on economic growth of those countries which have followed inward looking
development strategies.
Borenzstein et al. (1988) uses cross sectional data for 67 developing countries for the period
1970-89. Using seemingly unrelated regression methods they find that FDI has a positive effect on
economic growth due to the both technology diffusion and the magnitude of the relationship is
dependent on the quality of human capital of the host country.
De Mello (1989) concludes that FDI has positive impact on economic growth but this evidence
is weak. Zhang (2001) finds the existence of the positive relationship between FDI and economic
growth and concludes that the magnitude of the above mentioned relationship depends upon host
country’s conditions. Bengoa and Sanchez-Robles (2003) analyze panel data of 18 Latin American
countries and reach to the same conclusion.
Charkovic and Levine (1998) use both panel and cross section data for 72 developing and
developed countries for the period 1960-95 for analyzing the relationship between FDI and
economic growth. They employ OLS and GMM methods of estimation and fail to find the existence
of the relationship between FDI and economic growth.
Johnson (2006) using panel and cross section data of 90 countries concludes that FDI increases
economic growth in developing countries due to technology spillovers but not in developed
economies. The study also examines the impact of FDI on economic growth in primary
manufacturing and services sectors. Alfaro (2003) is of opinion that the benefits of FDI vary across
sectors and the impact of FDI on primary sector is negative and its impact is positive and
ambiguous on manufacturing and services sectors respectively.
Li and Lue (2005) investigate the relationship between FDI and economic growth for eighty
four countries over the period 1970-1999. The study concludes that FDI and human capital both
have positive impact on the economic growth of developing countries. Chowdhury and Mavrotas
(2005) examine the causal link between FDI and economic growth over the period 1969-2000 from
Chile, Malaysia and Thailand. They find bidirectional causality between FDI and economic growth
in Malaysia and Thailand and one-way causality running from economic growth to FDI in Chile.
Kukeli et al. (2006) find a positive relationship between FDI and output in ten Central Asian
and Eastern European countries. Shujie and Wei (2007) find positive impact of FDI on the
economic growth of newly industrialized countries. Pardhan (2009) investigates the causal
relationship between FDI and economic growth in ASEAN countries namely Indonesia Malaysia,
Thailand Singapore and Philippines over the period 1970-2007. The study finds bidirectional
causality between FDI and economic growth except Malaysia.
Herzer et al. (2008) re-examine the FDI-led growth hypothesis for 28 developing countries.
Using Engle-Granger cointegration and error correction model, they fail to find the existence of
long-run and short-run relationship between FDI and economic growth in most of the countries
included in the sample. They find no evidence of causality between FDI and economic growth. Wu
and Hsu (2008) use cross-sectional data of 62 countries for the period 1975-2000 and find positive
and significant impact of FDI on economic growth only when the host countries have better level of
initial GDP and human capital.
Samimi et al. (2010) examine the role of FDI in economic growth of oil importing countries
(OIC) countries using panel data from 2000-2006. The results of panel regression approach show
that FDI and openness contribute positively to the growth performance of OIC countries. Further,
the study finds significant impact of FDI on growth in selected countries.
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3. Econometric Methodology
3.1 Panel Unit Root Tests
The necessary step in panel causality analysis is to check stationary properties of the panel data.
Numerous panel unit root tests are available in econometric literature. However, the most popular
panel unit root tests such as LLC (Levin et al. 2002) and IPS (Im et al., 2003) have been used in this
study.
LLC Test
LLC test is applied to a balanced panel which assumes that the autoregressive coefficients
remain constant for all panel members. This test is derived on the basis of Augmented Dickey
Fuller (ADF) principle. The general equation of LLC test is:
tiijti
j
itiiiti tYYYi
,,
1
1,,
(1)
where Yit is a series for panel country i (i = 1, 2, …, N) over the period t (t = 1, 2, …, T), pi is the
number of lags in the ADF regression and the error term εi,t are assumed to be IID (0, σ2) and also
independent across the units of the sample. The null hypothesis of non-stationary is as follows:
H0: ρi = ρ = 0 and alternative hypothesis is
H1: ρi = ρ < 0 for all i
Levin et al. (2002) suggests that this test does not give efficient estimates when sample size
exceed more than 250 cross-sectional units
3.2 Im, Pesaran and Shin (IPS) Test
Im, Pesaran and Shin (2003) assume that auto-regressive coefficient vary from country to
country. Like LLC test, this test is also based on Augmented Dickey- Fuller principle. The test
equation for IPS test is:
tijti
j
jitiiiti YYYi
,,
1
,1,,
(2)
where series Yi,t (i = 1, 2, …, N; t = 1, 2, …, T) is the series for panel country i over the period t; pi
is the number of lags in the ADF regression and the error terms εi,t are serially correlated. The null
and alternative hypothesis of IPS test are given as
H0: ρi = 0 for all i
H1: ρi < 0 for i = 1, 2, …, N1
ρi = 0 i = N1+1, N1 + 2, …, N
The IPS test-statistic is estimated by:
t
tEtNt
IPSvar
(3)
The terms tE and tvar are generated by simulations and tabulated by IPS.
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3.2.1 The Likelihood-based Panel Cointegration Test
To test the long-run relationship between variables in a heterogeneous panel of 14 Asian
countries, the maximum likelihood-based panel cointegration test developed by Larsson, Lyhagen
and Lothergon (2001) is employed in this study. The LLL method is based on Johansen (1988, 1995)
error-correction representation theorem, which is as
jijti
j
jitiiti YYYi
,,
1
,1,,
1
(4)
To estimate the above model, the multivariate cointegration trace test of Johansen (1988, 1995)
LRit is applied in individual cross-sectional units independently in such a way allowing
heterogeneity in each cross-sectional unit for said panel. The panel trace statistic can be obtained as
the average of N cross-sectional trace statistic.
The null hypotheses of panel cointegration (Larsson et al., 2001) rank test are:
H0: rank rrii for all i = 1, …, N against
H1: rank ki for all i = 1, …, N
The standardized panel cointegration trace test-statistic is given by:
K
NT
LRZVAR
ZKEkH
rHRLN
kHrH
/ (5)
where NTRL is the average of individual cross-section statistic and E(Zk) and Var (Zk) are the mean
and variance of the asymptotic trace statistic reported by Larsson, Lyhagen and Lothgern (2001).
Moreover, the LLL test is one sided and follow Z distribution.
3.2.2 Panel FMOLS
When all variables are cointegrated, the next step is to calculate the long-run estimates. In the
presence of cointegration, OLS estimates do not give efficient results. Therefore, FMOLS presented
by Pedroni (2000, 2001) is applied to estimate long-run coefficients. The panel FMOLS estimator
for the coefficient β is defined as:
iit
T
t
iit
T
t
iit
N
i
NT TYXXXXN ˆ*
1
1
1
2
1
1* (6)
The associated t-statistic is assumed to be normally distributed.
3.3 Panel Causality Test
Hurlin and Venet (2001) developed more advanced version of Granger causality test regarding
panel data models with fixed coefficients. Mathematical equation, which is used for empirical
estimation, is presented below:
tikti
k
k
ikti
k
k
ti xYrY ,,
0
)(
,
1
)(
,
(7)
On the basis of model (9), Hurlin and Venet (2001) causality test is based on following three
major cases.
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3.3.1 Homogenous non-causality hypothesis (HNC)
Homogenous non-causality hypothesis (HNC) assumes non existence of causal relationship
across N. In model (9), the null and alternative hypothesis is defined by
H0: PkNi
k
i ,1,,10)(
H1: ki, such that 0)( k
i
Wald statistic is employed to test these NP (restrictions on cross sectional unit):
]
1[][ 112
PPNNT
RSS
NP
RSSRSSFhnc
(8)
Here RSS2 is the restricted sum of squared residual obtained under H0 and RSS1 is unrestricted
residual sum of squares of equation (10). If the calculated value of F-statistic is less than critical
value, the homogeneous non-causality hypothesis is accepted and the results describe that the
variable FDI is not causing GDP in finite sample set of Asian countries.
3.3.2 Homogenous causality hypothesis (HC)
Homogenous causality hypothesis (HC) assumes that there exist N causality relationships. Null
and alternative hypotheses of homogenous causality are following:
H0: Pk ,1 such that Ni
kk
i ,1,
H1: NjiPk ,1),(,,1 such that k
j
k
i
The Homogenous causality (HC) hypothesis implies that the coefficients of the lagged
explanatory variable Xi,t-K are identical for each lag K and are also different from zero. In order to
test the homogenous causality hypothesis, F statistics is calculated by the following formula:
]
1[]
1[ 113
PPNNT
RSS
NP
RSSRSSFhc
(9)
If the Fhc statistics with P (N − 1) and NT − N (1 + P) − P degrees of freedom is not significant,
the homogenous causality hypothesis is accepted. This implies that the variable FDI is causing GDP
in the N countries of the samples, and that the autoregressive processes are completely homogenous.
3.3.3 Heterogeneous non-causality hypothesis (HENC)
Finally, heterogeneous non-causality hypothesis assumes that there exists at least one and at the
most N − 1 equalities.
HENC being an individual test is realized for each individual country. For each individual
country, we test that all coefficients of the lagged explanatory variable Xi,t−K are equal to zero. Then,
for each i, hypothesis 0k
i , Pk ,1 can be tested by calculating following formula:
]
21[][ 11,2
PPNNT
RSS
P
RSSRSSF
i
henci
(10)
The calculation of F statistic allows identifying the individual country for which there is no
causality relationship.
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3.4 Data Source and Variables
For analyzing FDI and growth linkages, data has been collected from World Development
Indicators (WDI) of World Bank over the period 1983-2008 for the following selected Asian
countries: Pakistan, India, Sri Lanka, Bangladesh, Malaysia, Indonesia, Thailand, Philippines,
Nepal, Japan, China, Singapore, Korea Dem, and Maldives. Both variables, GDP (gross domestic
product) and FDI (inflow of foreign direct investment) are expressed in US Dollars. Furthermore,
GDP and FDI have been transformed in natural logarithms.
4. Empirical Analysis
4.1 Unit Root Test Results
The preliminary step in analyzing the relationship between FDI and economic growth is to check whether the underlying series are stationary at first difference or at level? For this purpose, LLC, IPS panel unit root tests have been applied to the panel of fourteen countries.
The results presented in Table 1 show that both panel series (GDP and FDI) are non-stationary in their level form either with an intercept or with both intercept and trend. However, both series are stationary at their first difference, thus, indicating that both the series are integrated of order 1, i.e. I(1).
Table 1 Panel Unit Root Tests
LLC TEST
Variables Level 1st Difference
Intercept Trend & Intercept Intercept Trend & Intercept
GDP 3.2281 3.9401 –4.7039*** –4.0901***
FDI 1.3195 1.4599 –3.2477*** –2.2455**
IPS TEST
Variables Level 1st Difference
Intercept Trend & Intercept Intercept Trend & Intercept
GDP 6.4554 3.3348 –5.3571*** –4.0308***
FDI –0.7903 –0.1099 –10.8731*** –9.1857*** Note: *** and ** denote rejection of null hypothesis at 1% and 5% level of significance, respectively.
4.2 Panel Cointegration Test Results
Having confirmed the order of integration of the panel series, the next step is to check the
possibility of long-run relationship between variables. For this purpose, cointegration test is applied
both at individual as well as panel level. The Johansen’s maximum likelihood (LR) test has been
applied in each country separately while Larsson et al. (2001) likelihood based panel cointegration
test is employed to the panel of fourteen countries.
The estimated results of Johansen tests are reported in Table 2. The results show that there are
two cointegrating relations at 5% level of significance in India. While for Sri Lanka, Maldives,
Thailand, China and Philippines, one cointegrating relation is identified at 5% level of significance.
However, no cointegrating relation is observed in cases of Pakistan, Bangladesh, Nepal, Indonesia,
Malaysia, Singapore, Japan and Korea Dem. The existence of long-run relationship by applying
individual country cointegration test has not much importance because the major emphasis of this
study is on panel cointegration test.
Results of Larsson et al. (2001) likelihood based (LR) panel test of cointegration are presented
in Table 3. Rejection of panel LR test indicates that the average of individual LR test statistic across
the countries in the panel exhibits the long-run relationship.
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The results reveal that panel likelihood ratio is 6.7973 which is greater than critical value of
1.645 at 5% level of significance. The null hypothesis of no cointegration is rejected at panel level.
Based on the likelihood based panel cointegration test it can be concluded that both GDP and FDI
are cointegrated. Therefore, there exists a unique long-run relationship between FDI and economic
growth among all the selected countries over the sample period.
Table 2 Johansen Cointegration Test
Countries H0 Likelihood ratio 5% critical value p-value
Pakistan R = 0 25.1563 25.8721 0.0612
R ≤ 1 3.4902 12.5179 0.8139
India R = 0 35.6800** 25.8721 0.0022
R ≤ 1 14.6214** 12.5179 0.0219
Bangladesh R = 0 14.0666 25.8721 0.6521
R ≤ 1 4.12392 12.5179 0.7241
Sri Lanka R = 0 28.2819** 25.8721 0.0246
R ≤ 1 3.9226 12.5179 0.7533
Maldives R = 0 46.9006** 25.8721 0.0000
R ≤ 1 6.0553 12.5179 0.4533
Nepal R = 0 14.1699 25.8721 0.6436
R ≤ 1 4.0513 12.5179 0.7346
Indonesia R = 0 16.9249 25.8721 0.4206
R ≤ 1 3.1001 12.5179 0.8644
Malaysia R = 0 16.6530 25.8721 0.4413
R ≤ 1 4.0201 12.5179 0.7392
Thailand R = 0 27.4131** 25.8721 0.0319
R ≤ 1 4.2190 12.5179 0.7102
Singapore R = 0 15.0922 25.8721 0.5669
R ≤ 1 3.5876 12.5179 0.8006
China R = 0 28.8661** 25.8721 0.0206
R ≤ 1 7.4112 12.5179 0.3036
Japan R = 0 17.4273 25.8721 0.3837
R ≤ 1 7.2291 12.5179 0.3212
Philippines R = 0 26.9809** 25.8721 0.0363
R ≤ 1 4.4132 12.5179 0.6818
Korea Dem R = 0 20.4388 25.8721 0.2045
R ≤ 1 2.8294 12.5179 0.8961
Note: ** denotes cointegration at 5% level of significance.
Table 3 Panel Cointegration Test
Hypotheses Likelihood ratio 5% critical value
R = 0 6.7973** 1.645
R ≤ 1 0.4105
Note: ** denotes rejection of null hypothesis at 5% level of significance.
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4.3 Panel FMOLS
The results of country-by-country FMOLS and panel FMOLS are presented in Table 4. The coefficients of FDI in all the countries appear to be positive and significant at 1% level in case of Pakistan, India, Sri Lanka, Bangladesh, Maldives, Malaysia, Singapore, Thailand, China, Philippines and Korea Dem. This is an indication of the positive contribution of FDI in economic growth in selected Asian countries.
Table 4 Panel FMOLS Estimates (Dependant variable: LGDP)
Country Independent Variable
LFDI S.E. t-value
Pakistan 0.38939*** 0.02704 14.3992
India 0.23323*** 0.06061 3.8476
Sri Lanka 0.36518*** 0.05921 6.1670
Bangladesh 0.14495*** 0.01426 10.1602
Nepal 0.09880 0.06888 1.4343
Maldives 0.07776*** 0.02315 3.3591
Indonesia 0.00692 0.01400 0.4945
Malaysia 0.56319*** 0.087824 6.4127
Thailand 0.42646*** 0.048842 8.7314
Singapore 0.72464*** 0.045600 15.8913
China 0.51574*** 0.05244 9.8346
Japan 0.01859 0.05931 0.3135
Philippines 0.26865*** 0.04493 5.9781
Korea Dem 0.40043*** 0.12758 3.1388
Panel 0.29610*** 0.02885 10.2622
Note: *** denotes significance of coefficient at 1% level.
5. Test Results for Panel Causality
5.1 Homogenous Non-Causality and Homogenous Causality
The estimation results of homogenous non-causality hypothesis and homogenous causality
hypothesis are reported in Table 5. The results of homogeneous non-causality hypothesis show that
GDP has no significant impact on FDI. The probable reason of this result may be that on average
economic growth in selected Asian countries is lesser than the certain level of economic growth
required for having positive impact on FDI. Although some of the Asian countries included in the
panel like Pakistan, India, China, Bangladesh, Philippines and Sri Lanka have shown better growth
performance as compared to other low and middle income countries collectively but their growth
appears to be lesser than the world average. Furthermore, for attracting FDI some of these countries
lack better growth determinants like sufficient stock of capital accumulation, quality education,
better institutional setup, liberal trade policies, macroeconomic stability and political stability.
However, the results confirm the existence of unidirectional causality running from FDI to
economic growth in selected panel.
Table 5 Homogenous Non-Causality and Homogenous Casualty
Dependent variables
Homogenous Non-Causality Homogenous Causality LGDP LFDI LGDP LFDI
LGDP – Causality exist*** – Causality exist*** LFDI No causality – Causality exist*** –
Note: *** represents the significance level at 1%.
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After testing the homogenous non-causality hypothesis the next step is to test the homogenous causality hypothesis which assumes homogenous relationship between FDI and economic growth. The results indicate the existence of bi-directional causal relationship between FDI and economic growth. Therefore, it can be concluded that FDI has contributed positively to economic growth of all the selected countries. This brings up the need for formulating and implementing the similar and effective policies for attracting FDI.
5.2 Heterogeneous Causality
Final step in causality analysis is to check heterogeneous causal relationship between FDI and economic growth in each selected country. Results of heterogeneous causality are presented in Table 6. The results show that economic growth has significant impact on FDI inflow in Pakistan, Bangladesh and Sri Lanka. It reveals that flow of FDI is dependent on economic growth. Hypothesis pertaining to unidirectional causal relationship from FDI to economic growth has been accepted only in case of Nepal, Singapore, Japan and Thailand. These findings support the FDI-led growth hypothesis in these countries. Malaysia is the only country where two-way causal relationship between FDI and economic growth is observed which shows that economic growth and flow of FDI are dependent on each other. So any policy aiming to stimulate one of the two variables is likely to have positive impact on other variable both directly and indirectly. However, surprisingly no causality is observed in India, Maldives, Indonesia, China, Philippines and Korea Dem. This indicates that these countries need to formulate and implement better investment policies to obtain the full beneficial effect of FDI inflows on economic growth.
Table 6 Heterogeneous Casualty
Country Variables LGDP Decision LFDI Decision
Pakistan LGDP – – 0.19 No causality LFDI 10.73*** Causality exists – –
India LGDP – – 0.40 No causality LFDI 1.56 No causality – –
Bangladesh LGDP – – 1.11 No causality LFDI 8.96*** Causality exists – –
Sri Lanka LGDP – – 0.98 No causality LFDI 5.15*** Causality exists – –
Maldives LGDP – – 2.09 No causality LFDI 0.21 No causality – –
Nepal LGDP – – 3.56** Causality exists LFDI 0.07 No causality – –
Indonesia LGDP – – 0.05 No causality LFDI 0.01 No causality – –
Malaysia LGDP – – 3.29** Causality exists LFDI 3.64** Causality exists – –
Thailand LGDP – – 3.50** Causality exists LFDI 0.36 No causality – –
Singapore LGDP – – 3.36** Causality exists LFDI 0.76 No causality – –
China LGDP – – 1.72 No causality LFDI 0.17 No causality – –
Japan LGDP – – 4.87*** No causality LFDI 1.94 No causality – –
Philippines LGDP – – 1.01 No causality LFDI 2.32 No causality – –
South Korea Dem
LGDP – – 2.49 No causality LFDI 0.02 No causality – –
Note: *** and ** denote significance at 1% and 5% level of significance, respectively.
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No doubt some of these countries have received massive inflows in the past decade. But the
impact of FDI on economic growth in these countries appears to be quite negligible. For example,
in India and China the impact of FDI on economic growth is not significant although their
economies are booming presently. The probable reasons of this result may be the functioning of
multinational firms which have their vested interests, rising income inequality, environmental
degradation, ethnic tension, corruption and rising transportation cost.
6. Conclusions
The basic purpose of this study is to test empirically the causal relationship between FDI and
economic growth by applying more advanced panel techniques in selected Asian countries for the
period 1983-2008. The empirical results based on panel unit root tests show that both the series are
I(1). Likelihood-based panel cointegration test confirms the existence of long-run relationship
between FDI and economic growth in the panel of fourteen countries. However, at individual level,
Johansen cointegration analysis confirms the existence of long-run relationship only in case of India,
Sri Lanka, Maldives, Thailand, China and Philippine. FMOLS estimates confirm the positive
impact of FDI on economic growth.
Panel homogenous causality hypothesis shows the existence of bi-directional causality between
FDI and economic growth in the selected panel. The results of panel homogenous non-causality
hypothesis describe the existence of one-way causality from FDI to economic growth in panel
countries. The results of heterogeneous causality hypothesis show bi-directional causality between
FDI and economic growth only in case of Malaysia. FDI-led growth hypothesis is valid in four
countries namely, Nepal, Singapore, Japan and Thailand whereas GDP growth-led FDI hypothesis
is accepted in case of Pakistan, Bangladesh and Sri Lanka. However, causality in any direction is
not observed in the case of India, Maldives, Indonesia, China, Philippines and Korea Dem. Based
on the findings of the study, it is recommended that Asian Countries need to formulate sound
investment policies both at national and international level to attract foreign direct investment. The
results of this study may be helpful for academia and policy makers for stressing on the proper use
of FDI for raising the pace of economic growth in Asian countries.
One important point that needs to be mentioned is the absence of conditional variables from the
model and the present study may be helpless in capturing the full impact of FDI on economic
growth. It brings up the need of exploring the relationship between the two variables by including
conditional variables in the model. This seems to be consistent with the literature and suitable to
address the questions involving the causal relationship between FDI and economic growth in
selected Asian countries. It is left on the interested readers to investigate the causal relationship
between the two variables through including appropriate conditional variables in the model using
recent advances in dynamic modeling.
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