Do Host Country Factors Affect The Impact Of Foreign Direct Investment On Economic Growth

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Do Host Country Factors Affect The Impact Of
Foreign Direct Investment On Economic Growth?

• Edna Solomon
• 27 November, 2006
• ESDS International Annual Conference 2006

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Objective

• What is the impact of FDI on Economic Growth?
• Do three host country factors
• the level of human capital,
• the level of financial development and
• the level of institutional quality
• affect the impact of FDI on Economic Growth?

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Outline

• Introduction
• Model
• Data
• Results
• Conclusion

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Motivation Volume of FDI Inflows

• Source Data from IMFs BOPS(2005) from the ESDS
  International Databank.

Graph indicates a massive increase in FDI in the
last decade alone.
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Literature Review (FDI Growth)
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Literature Review (FDI, HCFs Growth)
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My Contribution

• Most studies focus on the interaction between FDI
  and one HCF.
• But I shall investigate the impact of human
  capital, financial development quality of
  institutions simultaneously on the FDI/growth
  relationship..
• Use of System GMM method of estimation.

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Model-Theoretical

• The model that I used was adopted from Borenstein
  et. al. (1998)
• Use of an EGM with TP driver of growth
• Mechanism Increase in variety of capital goods
  (N) ?TP ?growth
• YtAHt?kt1-?
• There exists N varieties of kt
• N n n??

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Model-Empirical

• gc0c1FDIc2FDI?Hc3Hc4Y0c5A.
• Where ggrowth rate of gdp per capita for each
  decade 1970-79 1980-89.
• FDIFDI as a ratio to GDP.
• HHuman capital.
• Y0Initial GDP per capita.
• Aset of other variables that.
• affect economic growth.

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My Empirical Model

• Model 1 gitc0c1FDIitc2Hitc3FDIit?Hitc4Y0itc5
  FINitc6FDI ? FINit c7IQit c8FDI ? IQit ?t
  ui ?it.
• ui unobservable individual country specific term
  eg differences in steady state growth paths among
  countries.
• ?ttime dummies, proxy global shocks.
• ?it random error term.
• Sample period 1970 to 2003 in 7 five year
  intervals

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Data-proxies
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Data-proxies Cont
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Data Countries in Sample
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Data Challenges

• Collection of data for several countries (83) for
  several years (35 years).
• Sources of data.
• Reliability.
• Single sources for homogeneity of methodology.
• ESDS databank helps ease the above problems, and
  hence is invaluable in macroeconomic research.

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System GMM

• System GMM (ABBB estimator) is an estimation
  technique used in dynamic panel data models
• Relatively new as it was created by Arellano and
  Bover (1995) and Blundell and Bond(1998).
• Advantages
• Estimates do not longer suffer from omitted
  variable bias caused by the unobserved country
  specific effects.
• It is able to control for endogeneity of all the
  explanatory variables.
• Useful where the dataset in persistent and the
  time periods are relatively short.

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Results (LINEAR)
T-ratios in parenthesisDept vargrowth rate of
gdp per capita.
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Results (WITH QUADRACTIC TERMS)
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Conclusion

• The positive impact of FDI on economic growth
  depends on the level of human capital and
  financial development of the host country.
• Human capital affects the relationship between
  FDI and economic growth in a non linear way.