Topics: Economics, Economic growth, Macroeconomics Pages: 13 (4227 words) Published: January 6, 2013
| 2012|
| Gaurav Jain: Roll no. 20Hemant Agarwal:Roll no. 104Sanjam Sidana: Roll no. 47|

Foreign Direct Investment, Exports, and Economic Growth in Selected Emerging Countries: Multivariate VAR Analysis| |

Table of Contents
Historical Background5
Literature Review7


This study adopts a time series framework of the Vector Error Correction Models (VECM) to study the dynamic relationship between export, FDI and GDP for six countries namely Chile, India, Mexico, Malaysia, Pakistan and Thailand. Relevant Studies that have been conducted in the past have been reviewed as a part of this study and the literature review corresponding to each study is a part of this report. The six countries are so chosen because given that these countries are at different stages of growth, we will be able to identify the impact of FDI and export on economic growth at different stages of growth. Data pertaining to the exports, annual GDP and annual FDI for each of these countries for the last 15 years has been used for the analysis. The tools used for analysis are as follows:

1. Dickey Fuller Test
2. Phillips–Perron test
3. Vector Error Correction Model


In an open economy, technology and knowledge may also be transferred through exports and imports, and thus promote economic growth. However, growth also has effects on trade. In the development literature, this is known as the relation between trade regime/outward orientation and growth. The topic of exports-growth nexus has been a subject of extensive debate since long. Studies have found surprisingly that there is no obvious agreement to whether the causality dictates export-led-growth or growth-led-exports, although the early cross-section studies favour the former. Most of the studies find positive effects of FDI on transitional and long-run economic growth through capital accumulation and technical or knowledge transfers, especially under open trade regime. However, some studies show that these positive effects may be insignificant or the effects may even be negative, possibly due to crowding out of domestic capital. Some also point out that the multinational corporations (MNC) tend to locate in more productive, fast growing countries or regions, thus FDI inflows could be attracted to the growing economies and markets. In short, the causality of FDI and economic growth can run bidirectionally. Trade and FDI are related positively (complement) between asymmetric countries and negatively (substitute) between symmetric countries. They also depend on whether FDI is market-seeking (substitutes) or efficiency-seeking (complements), ‘‘trade-oriented’’ or ‘‘anti-trade oriented’’, or at the early product life-cycle stage (substitute) or at the mature stage complement. Thus, the relation may be positive or negative, if there is a relation at all. On the other hand, exports increase FDI by paving the way for FDI by reducing the investors’ transaction costs though the knowledge of host country’s market structure. FDI may reduce exports by manufacturing goods directly in the host countries to save transportation costs. The paper focuses on the emerging countries of India, Pakistan, Malaysia, Thailand, Chile and Mexico. Given that these countries are at different stages of growth, we will be able to identify the impact of FDI and export on economic growth at different stages of growth. The data used corresponds to the period of 1996 to 2010 taken from World Bank data. The test used to analyse the relation between the three are Dickey Fuller Test and the ADF testing methodology. Historical Background

The Asian financial crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a worldwide economic meltdown due to financial contagion. The crisis started in Thailand...
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