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