Impact of Foreign Direct Investment

Topics: Economics, International trade, Economic growth Pages: 17 (4197 words) Published: January 5, 2011
Qual Quant (2011) 45:223–231 DOI 10.1007/s11135-009-9272-5 RESEARCH NOTE

Foreign direct investment, trade openness and economic growth in pakistan and turkey: an investigation using bounds test Mushtaq Ahmad Klasra

Published online: 4 September 2009 © Springer Science+Business Media B.V. 2009

Abstract In the literature empirical evidences regarding export-led growth (ELG), FDIled exports, and growth-driven exports (GDE) hypotheses have been mixed and inconclusive. This paper uses the autoregressive distributed lags (ARDL) model (Pesaran and Shin, Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium, 1990) and tests the existence of long run equilibrium relationship between the determinants of growth during the period 1975–2004 for Pakistan and Turkey. The results indicate that in the short run there is bi-directional causal relationship between trade openness and exports for Pakistan and FDI and exports relationship for Turkey. The long run relationship results support the growth-driven exports hypothesis for Turkey and openness-growth nexus in Pakistan. Keywords Economic growth · Foreign direct investment · Autoregressive distributed lags model (ARDL) · Causality · Pakistan and Turkey

1 Introduction Perhaps the main critical issue that mostly occupies the minds of policy makers is ‘how the economic growth of a country could be accelerated?’ In other words, what are the factors that affect economic performance of a country? The answer to this question remained uncertain. To some, it is the export-promoting strategy, others name FDI-friendly strategy as a main contributor to economic growth, and to others it is the extent of trade openness of a country that matters for economic growth. There appears no consensus among researchers in the literature on this issue. Their views remain mixed and inconclusive. Quite a large number of economists broadly agree that FDI plays a major role in the development process of a country. They argue that FDI affects economic growth through various venues like, increasing capital formation, advanced technology and know-how, employment

M. A. Klasra (B ) Institute of Management Sciences (IMS), Bahauddin Zakariya University, Multan, Pakistan e-mail:



M. A. Klasra

and possible spillovers effects on the local firms. Many studies tried to quantify its contribution to economic growth and came up with mixed results. For example Borensztein et al. (1998), De Mello (1999) and Obwona (2001), while exploring the relationship between FDI and economic growth confirmed the FDI-led growth hypothesis. But some studies like, Zhang (2001), Balasubramanyam et al. (1999) and Woo (1995), though, found FDI beneficial for economic growth but concluded that its benefits are not automatic rather are contingent upon certain characteristics of the host country. The nature of association between exports and economic growth also remained widely debated among researchers in the recent past. Researchers remain divided on the question whether economic performance is export-led or growth driven? For example Gkatak et al. (1997) for Malaysia, Dhawan and Biswal (1999) for India supported the export-led growth (ELG) hypothesis. This hypothesis maintains that the economies exporting a major share of their outputs appear to grow faster than other. The growth of exports, in fact, is seen as a stimulating factor across the country and causes economic growth to increase as economy becomes open to international trade. There are, however, some studies that maintain that it is the growth of GDP that leads to corresponding expansion of trade. This growth-driven export (GDE) hypothesis is advocated by Bhagwati (1988), Findlay (1984), Vernon (1996) and Segerstrom et al. (1990). They base their assertion on neoclassical trade theory, which typically stresses the causality that runs from home-factor endowments and productivity to the supply of exports.1...
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