Foreign Direct Investment Inflows in India-Opportunities and Benefits

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The relationship between Trade, FDI and Economic growth in Tunisia: An application of autoregressive distributed lag model

Dr. Mounir BELLOUMI Address: Faculty of Economics and Management of Sousse, University of Sousse City Erriadh 4023 Sousse Tunisia. E-mail: mounir.balloumi@gmail.com / mounir.belloumi@fdseps.rnu.tn Phone: +216 73 30 18 09 Fax: +216 73 30 18 88 Abstract: This paper examines the dynamic causal relationships between foreign direct investment (FDI), trade and economic growth in Tunisia by applying the bounds testing (ARDL) approach to cointegration for the period from 1970 to 2008. The bounds tests suggest that the variables of interest are bound together in the long-run when foreign direct investment is the dependent variable. The associated equilibrium correction was also significant confirming the existence of long-run relationship. The results indicate also that there is no significant Granger causality from FDI to economic growth, from economic growth to FDI, from trade to economic growth and from economic growth to trade in the short run. Key words: FDI, trade, economic growth, ARDL cointegration, Tunisia. JEL classification: C22, F13, F21.

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1. Introduction
Trade and FDI inflows are well known as very important factors in the economic growth process. Trade plays the role of upgrading skills through the importation and adoption of superior production technology and innovation. Exporters use innovation and developed production technology either by acting as subcontractors to foreign enterprises or through international markets competition. Producers of import-substitutes face competition from foreign firms. They are pushed to adopt more capital-intensive production facilities to face the hard competition in developing countries where products are usually capital-intensive (Frankel and Romer, 1999). The impact of trade openness on economic growth can be positive and significant due mainly to the accumulation of physical capital and technological transfer. Inward FDI can play an important role by increasing and augmenting the supply of funds for domestic investment in the host country. This is can be done through production chain when foreign investors buy locally made inputs and sell intermediate inputs to local enterprises. Furthermore, inward FDI can increase the host country’s export capacity causing the developing country to increase its foreign exchange earnings. FDI can also encourage the creation of new jobs and enhance technology transfer and boosts overall economic growth in host countries. The majority of past empirical studies have dealt with either trade and FDI interaction on economic growth (Balasubramanyam et al., 1996; Karbasi et al., 2005), or the relationship between FDI and economic growth (Lipsey, 2000) or the relationship between trade and economic growth (Pahlavani, et al., 2005). All these studies have concluded that both FDI inflows and trade promote economic growth. However, the studies have failed to provide a conclusive result on the relation in general and the direction of the causality in particular in many developing countries. The growth enhancing effects from FDI inflows and trade vary from country to country and overtime. For some countries FDI and trade can even negatively affect the economic growth (Balasubramanyam et al., 1996; Borensztein et al., 1998; Lipsey, 2000; De Mello, 1999; Xu, 2000). Some past studies on this subject suffer from two limitations. The first limit is that these studies used cointegration techniques based on either the Engle and Granger (1987) cointegration test or the maximum likelihood test based on Johansen (1988) and Johansen and Juselius (1990). Or, these cointegration techniques may not be appropriate when the sample 2

size is too small (Odhiambo, 2009). Odhiambo (2009) uses the bounds testing cointegration approach developed by Pesaran et al. (2001) which is more robust for the small sample. The second limit is that by using...
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