IMPACTS OF FDI ON ECONOMIC GROWTH OF HOST COUNTRY
JOSELINE NICHOLASDEPARTMENT OF ECONOMICS, MCMASTER
UNIVERSITY
Outline Economic QuestionEconomic policyResearch
Source of DataEmpirical MethodsTables 1 to 6ResultsImplications
Internal StrengthsInternal WeaknessesExternal StrengthsExternal
WeaknessesQuestion for
Discussion
Economic Question Does FDI facilitate economic growth
in host countries?Policies- FDI policies
- Is allowing more FDI inflows one of the great policies that would foster economic growth?
ArticleBang, T. & Nob, I., (2009), Sectoral
analysis of foreign direct investment and growth in the developed countries. Journey of International Financial Markets, Institutions and Money. Vol 19(2) 401-413.Economic question and policies are the
same as my research paper
LiteratureLi and Liu (2005) found that FDI affects
growth both direct and indirectly through its interaction with human capital
De Mello (1999) found a positive effect of FDI on economic growth both in developing and developed countries
Durham (2004) found that only countries with strong institutional development and investor-friendly trade policies enjoy the impacts of FDI on economic development.
DataPanel data for 23 years (1980-2003), 6 countries.Sources:
OECD Structural Statistic Analysis (STAN), 2006 edition.
Value added, investment, employmentInternational Direct Investment Statistics Yearbook
Only 12 sectors match with STANUnited nations database
Secondary school enrollmentInternational country risk guide
VariablesDependent variable
Growth, measured by value addedIndependent Variables
Log of FDILog of labourInteraction of FDI and log of labourLog of capital
Model
VAL= Value addedFDI= Log of FDILAB=LabourFDILAD=Interaction between FDI and log of labourCAP= CapitalCON= Other control variablesDummy variables include i=sector; c=country; t=year
Table 1Column 1.1 (all variables but FDI AND
FDILABColumn 1.2 (all variables but FDILAB)Column 1.3 (all variables but FDI)In column 1.4 (all variable)FDI is significant at 1% & FDILAB significant
at 10%
Table 2Regression on Data for 1992-2003
Column 2.1 (all variables but FDI AND FDILABColumn 2.2 (all variables but FDILAB)Column 2.3 (all variables but FDI)In column 2.4 (all variable) FDI is significant at 1% & FDILAB significant
at 10%Equivalent results, FDI has bigger coefficient
in 2.2
Table 3 (Sectoral effects)3.3 ( only FDILAB) Results reveal that the
indirect effects of FDI on growth via interaction with labor also differ across sectors.
3.4 ( FDILAB), results are different; all sectors have positive and significant coefficients except for financial intermediation.
THEREFORE: the impact on FDI on economic activity is substantially different across production sectors.
Table 4FDI has positive and significant effect on
the level of technology in the OECD, as measured by TFP.
Table 5Columns 5.1 and 5.2 report the effect of
FDI on domestic capital. They show that FDI causes “crowding in” effects on real estate, oil and chemical, machinery, and trade and repair sectors. The effects on other sectors are not statistically significant.
Columns 5.3 & 5.4 significance varies across sectors
TABLE 6- Country-specific and sector-specific effects of FDI on economic growth (GDP g. rate)Show that FDI effects on growth are only
positive and significant for the United States and the Netherlands.
FDI effects on growth for each of the other countries in the G6 are not significant
ResultsResults from this study show a
significant and positive relationship between FDI and economic growth, which is not equally distributed across sectors.
Policy implications
Effect of FDI on economic growth is not equally distributed across sectors. In some sectors, we find no evidence that FDI enhances economic growth.
Internal StrengthsCountry, sector and time fixed effects
controlled for.Time-series data allows for researcher to
capture social and economic changes and effects over the course of 23 years.
Countries with missing or inaccurate data were excluded
Internal WeaknessesMismatch of data between STAN
and IDIMissing data and estimation
Sectors reduced From 32 to 12 Out of 12 sectors, data on R&D, imports and exports mismatch in 5
School enrollment not an accurate measure of human capital
External strengthsMultiple sectors of the economy were surveyed
Study conducted in OECD countries, hence results are valid in Canada, USA, Germany, Denmark, Netherlands, Spain, UK.
External WeaknessesStudy may not apply developing countries. The effect of FDI on economic growth could vary based on country’s ability to
Choice of industries and companies is not random, it’s driven by data availability
Question for discussionSpill overs- Could there be any
possibilities that FDI in certain sectors is more productive in generating value added in other sectors