National University of Modern Languages LHR Campus

Submitted To:Mr, Waseem Abbas Submitted By:Irfan Haider Umair Jabbar Abbas Akhtar

Class:MBA 6th

Subject:-

IFM

Date:- 25-12-2013

Abstract
The object of this paper is to study the relationship between (FDI) foreign direct investment and inflation, exchange rate, GDP gross domestic product, and GDP growth and corporate tax rate in the countries Pakistan, Indonesia and Malaysia. A result shows that there is a significant relationship of FDI in Pakistan with independent variables except GDP growth rate. But in Indonesia and Malaysia insignificant relationship of FDI with all independent variables.

Introduction
Foreign direct investment is out of border investment by a home entity in one country with the object of obtaining a long term interest in an enterprise resident in another country. The main object of this study is to find out the relationship of FDI with Inflation, Exchange Rate, GDP or Economic growth, GDP Growth Rate, Corporate Tax Rate. Due to dynamically innovation in the technology and investment in the foreign enterprises significantly made changes in size and scope of FDI. Two types of foreign direct investment (FDI) one is inward foreign direct investment and other is outward foreign direct investment. Inward means the inflow of investment or cash in the specific country and outward foreign direct investment indicates outflow of investment or cash from the specific country. The difference of the inward and outward foreign direct investment is called net foreign direct investment for the specific country. We find out the results through Multiple Regression Model technique. Inflation is the rate at which the general level of prices for goods and services is up and subsequently purchasing power is falling. In our study inflation is independent variable only FDI is dependent variable. GDP is the monetary value of all the finished goods and services produced within a country in a specific period of time. It includes all type of private and public consumption, government expenditure, investments and exports less imports that occur within a defined region. Corporate tax that must be paid by a corporation based on the amount of profit generated. The amount of tax, and how it is calculated, varies depending upon the region where the company is located. Corporate taxes vary from region to region. In the U.S they are charge at both the federal and state levels. Exchange rate is the current market price of one currency for which one currency can be exchanged for another. The rate at which one currency can be exchanged for another GDP growth rate measure how fast the economy is growing? Theoretically its the percentage increase or decrease of GDP (Gross Domestic Product) compared to the previous quarter or specific period. When the economy is expanding, the GDP growth rate is positive. Mainly in our project we want to study the effects of Exchange rate, inflation rate, corporate tax rate, GDP and GDP Growth on the (FDI) Foreign Direct Investment in three countries Pakistan (home country) Indonesia and Malaysia. In our research multiple regression technique is used to analyze the data and we take data from the World Bank website (secondary data source) for all the selected countries.

Purpose of study:
Our object is to study the relationship of inflation rate, exchange rate, corporate tax rate, GDP, GDP Growth rate on FDI.

Research Problem:
To measure the variation in FDI due to independent variables (inflation rate, exchange rate, corporate tax rate, GDP and GDP growth rate.

Research Question:
Does the independent variable (Inflation Rate, Exchange Rate, GDP, GDP Growth, Corporate Tax Rate) have effect on dependent variable (FDI)?

Significance of Study:
We select FDI as dependent variable, because after literature review FDI is important variable which is affected by independent variables (inflation rate, exchange rate, corporate tax rate, GDP, GDP Growth rate). In our study we find out the relationship between dependent and independent variables. Its mean how much strongly effect the independent variables to dependent variable. We hope the selected independent variables have strong effect on FDI.

Conceptual Framework:
Our object is to study the relationship of independent variables and dependent variable. We select (FDI) as dependent variable and five independent variables. Which have impact on that variables these are Exchange rate, inflation, (GDP) gross domestic product, GDP growth rate and corporate tax rate.

Inflation Rate Exchange Rate Corporate Tax Rate GDP Rate GDP Growth Rate

Foreign Direct Investment

Literature Review
Ferrand evaluated effect of inflation on foreign direct investment. Ferrand assessed the positive effect of inflation on FDI and statistically significant. In developing countries inflation policy adoption a policy tool available for policymakers to get competitive advantage to attract more FDI if well implemented. (Ferrand, 2012) Sato says liquidity of labor and capital through globalization had go faster the efficient and global utilization of human resources and capital. Relationship between the corporate tax and foreign direct investment is significantly positive. If host country indicates reduction of one percent in corporate tax rate then foreign direct investment increased about 2.4% in host country. (Sato, 2012) Donghyun Park says Foreign direct investment has placed a fundamental role in Singapore. Park explores the relationship between FDI and corporate taxation from the Singapore viewpoint. The conclusion is that corporate taxation is clearly an important that has made Singapore a interesting FDI destination. In addition, Singapore practice shows that lower corporate taxes will have a much leading impact on promoting FDI inflows. (Donghyun Park, 2011) Jos fined the impact of inflation, exchange rate and the bidirectional influences within FDI and economic growth in Nigeria. This study takes time at the period of thirty years. A linear regression analysis was used on the thirty year data to conclude the relationship between exchange rate, inflation, FDI inflows as well as economic growth. The study reply that Inflation has entirely no effect on FDI. However exchange rate has impact on FDI.(Dunarea jos, 2011) Demirhan and Masca investigate the factors of foreign direct investment inflow in developing countries. Factors that affect FDI, growth rate of per capita (GDP), inflation rate, and corporate tax rate. Inflation rate and corporate tax rate have negative sign and statistically significant but growth rate per capita GDP positive sign and statistically significant. (Demirhan &Masca, 2008)

Falki study on the effect of the FDI had on economic growth of Pakistan. The study incorporated data on FDI collected from the Handbook of Pakistan economy of 2005. Data is collected from the period of 1980 to 2006 and select domestic variables, labor force or foreign invested capital. Falki used regression analysis and the endogenous theory of growth. Falki was able to find that FDI had a statistically inverse effect on the gross domestic product. (Falki, 2009)

Udoh by using GARCH model point out that exchange rate instability and inflation uncertainty apply significant negative effect on foreign direct investment. In host country for inflow of foreign direct investment there was essential factors like infrastructural development, appropriate size of the government sector and international competitiveness. Instability in inflation and exchange rates increased uncertainty and risk. (Udoh, 2008)

Park seek out that the Singapores outstanding economic success is the central role of foreign direct investment. Economic globalization and governments around the world for competing strongly with each other to attract FDI by offering financial incentives to foreign investors are the integral elements. In Singapore rapid growth of foreign direct investment the corporate taxation definitely important component to attract FDI. (Park, 2005)

Thema & Quere point out that corporate tax competition not need to lead zero taxation, because attractive countries use their location rent to maintain higher taxation rate. High corporate taxation discouraged FDI inflows. In receiver countries lower tax rates fail to significantly attract foreign investment, higher tax rates discourage new FDI inflows. Narrow tax differential dont much discourage inward FDI coming from crediting countries. Large tax rates differentials produce relatively more important FDI outflows. (Benassy-quere & Thema, 2004)

Barrell declare firms which concerned with both maximize profits and minimize risk would develop any correlation between exchange rate movements to minimize the difference of its total profit. U.S firms investing in Europe due to risk averse and decrease their investments as exchange rate volatility on FDI. Finally U.S investments move from Euro Zone to the UK due to an increase in correlation between the dollar exchange rate and euro dollar exchange rate. (Barrell, Gottschalk, & hall, 2004)

According to Lee foreign direct investment is an important medium for transfer of technology. FDI comparatively contribute more to growth than domestic investment. FDI hold higher output only when host country has a minimum entry stock of human capital. Another thing is FDI contribute to economy growth only when a sufficient absorptive means of the advance technology is available in host country. (Borensztein, De Gregorio, & Lee, 1998)

Faten study the relationship of economic growth, inflation, international trade and foreign direct investment. In which inflation has no relation toward economic growth its means increase in inflation will not affect the economic growth due to rising of general price level of goods. Balance of trade has negative relationship with economic growth while FDI have a positive relationship with economic growth. (Faten & Bt)

According to Feld & heckemeyer the continue political concern in the effectiveness of tax competition and tax management as well as the wealth of theoretical analysis, it still remain open whether or when tax competition is harmful. Average tax rates do not lead to significantly higher tax effect size estimates. Indeed more research is needed to find out whether provision of public

goods is empirically related to tax rate effects or whether this is really a pure tax competition game. (Feld & Heckemeyer)

Hypotheses
1st Hypotheses H0 = There is no relationship between FDI and Inflation. H1 = There is a relationship between FDI and Inflation.

2nd Hypotheses H0 = There is no relationship between FDI and Exchange Rate. H1 = There is a relationship between FDI and Exchange Rate. 3rd Hypotheses H0 = There is no relationship between FDI and GDP. H1 = There is a relationship between FDI and GDP. 4th Hypotheses H0 = There is no relationship between FDI and GDP Growth Rate. H1 = There is a relationship between FDI and GDP Growth Rate. 5th Hypotheses H0 = There is no relationship between FDI and Corporate tax Rate. H1 = There is a relationship between FDI and Corporate tax Rate.

Research Methodology:
The purpose of research paper is to study the relationship of FDI with Exchange Rate, Inflation, GDP Current, GDP Growth Rate, and Corporate Tax Rate in three different countries {Pakistan, Malaysia, Indonesia}. Study covers the time period from 1980-2012. World Bank considered as an authentic source for secondary data collection. Required secondary data of mentioned variables is collected from this reliable source. To examine the relationship between above mentioned variables the following theoretical model is used.

Research Model: FDI= + 1 Inflation + 2 Exchange Rate + 3 Average Corporate Tax + 4 GDP +5 GDP Growth Rate
To examine the relationship of FDI with Inflation, GDP, GDP Growth, Exchange Rate and Corporate Tax Rate in three different countries {Pakistan,Indonesia,Malaysia} by using linear multiple regression model is used. FDI = Foreign Direct Investment Level of significant = 5%

In this model FDI is dependent variable, inflation, GDP, GDP Growth rate, Exchange rate, Corporate Tax rate are independent variables. Multiple Regression model is applied over 19802012.

Model summery of Indonesia:

Model Summary Model R R Square Adjusted R Square 1 .986
a

Std. Error of the Estimate

.972

.902

1541042015.86 069500

a. Predictors: (Constant), Total tax rate indonesia, Exchange rate indonesia, Inflation rate indonesia, GDP growth indonesia, GDP current indonesia

Model summery of Indonesia shows the created model is significant. Figure shows in adjusted R2 90.2% variation explain by the independent variables (Inflation, Exchange Rate, Tax Rate, GDP,GDP Growth Rate) in dependent variable (FDI).

Model summery of Malaysia:

Model Summary Model R R Square Adjusted R Square 1 .940

a

Std. Error of the Estimate

.883

.591

2100304659.87 293220

a. Predictors: (Constant), Total tax rate malaysia, GDP growth malaysia, Inflation rate malaysia, Exchange rate malaysia, GDP current malaysia

Model summery of Malaysia shows the created model is significant. Figure shows in adjusted R2 59.1% variation explain by the independent variables (Inflation, Exchange Rate, Tax Rate, GDP,GDP Growth Rate) in dependent variable (FDI).

Model summery of Pakistan:

Model Summary Model R R Square Adjusted R Square 1 .998
a

Std. Error of the Estimate

.996

.986

217805430.296 22420

a. Predictors: (Constant), Total tax rate pakistan, GDP current pakistan, Inflation rate pakistan, Exchange rate pakistan, GDP growth pakistan

Model summery of Pakistan shows the created model is significant. Figure shows in adjusted R 2 98.6% variation explain by the independent variables (Inflation, Exchange Rate, Tax Rate, GDP, and GDP Growth Rate) in dependent variable (FDI).

Hypothesis for Model check:

H0 : Model is not significant. H1 : Model is significant. Here is above mentioned summery models shows reject H0 . Its mean model is significant.

Results of Indonesia:

Coefficients Model

Unstandardized Coefficients

Standardized Coefficients

Sig.

B (Constant) GDP current indonesia GDP growth indonesia 1 Inflation rate indonesia Exchange rate indonesia Total tax rate indonesia -229549474.479 -4489232.876 2243743698.897 -31472570356.059 .002 -2090595039.843

Std. Error 35808349672.093 .008 1847045324.729 313393115.941 2542038.379 619013915.335

Beta -.879 .110 -.258 -.152 -.459 1.264 .319 -1.132 -.732 -1.766 3.625 .472 .780 .375 .540 .219 .068

a. Dependent Variable: Foreign direct investment indonesia

Interpretation of results:
That table shows the results of Indonesia in which we discuss the standardized coefficients (Beta). In Indonesia GDP Growth Rate, Inflation rate and Exchange Rate shows negative relationship with FDI. GDP Current and total tax rate shows positive relationship with FDI. That table also shows sig value or p-value which is actually compared with level of significance assumes 5%. But after checking the results shows there is insignificant. Its means there is no any one independent variable which explains dependent variable. Thats occurring due to missing values in data.

Hypothesis:
H0 : GDP Current is not significant. H1 : GDP Current is significant. Accepted H0 H0 : GDP Growth is not significant. H1 : GDP Growth is significant. Accepted H0 H0 : Inflation Rate is not significant. H1 : Inflation Rate is significant. Accepted H0 H0 : Exchange Rate is not significant. H1 : Exchange Rate is significant. Accepted H0 H0 : Total Tax Rate is not significant. H1 : Total Tax Rate is significant. Accepted H0

Results of Malaysia:

Coefficients Model

Unstandardized Coefficients

Standardized Coefficients

Sig.

B (Constant) GDP current malaysia GDP growth malaysia 1 Inflation rate malaysia Exchange rate malaysia Total tax rate malaysia

Std. Error

Beta 2.001 -6.397 -1.159 .652 -6.102 -1.750 -1.809 -2.748 1.833 -1.982 -2.041 .183 .212 .111 .208 .186 .178

396841269842.874 198347971282.933 -.370 -1434773396.562 1432032562.220 -75863048809.899 -1509458929.006 .205 522206535.647 781065674.501 38279340661.067 739650711.324

a. Dependent Variable: Foreign direct investment malaysia

Interpretation of results:
That table shows the results of Malaysia in which we discuss the standardized coefficients (Beta). In Malaysia GDP Current, GDP Growth Rate, Exchange rate and Total Tax Rate shows negative relationship with FDI. Inflation Rate shows positive relationship with FDI. That table also shows sig value or p-value which is actually compared with level of significance assumes 5%. But after checking the results shows there is insignificant. Its means there is no any one independent variable which explains dependent variable. Thats occurring due to missing values in data.

Hypothesis:
H0 : GDP Current is not significant. H1 : GDP Current is significant. Accepted H0 H0 : GDP Growth is not significant. H1 : GDP Growth is significant. Accepted H0 H0 : Inflation Rate is not significant. H1 : Inflation Rate is significant. Accepted H0 H0 : Exchange Rate is not significant. H1 : Exchange Rate is significant. Accepted H0 H0 : Total Tax Rate is not significant. H1 : Total Tax Rate is significant. Accepted H0

Results of Pakistan:

Coefficients Model

Unstandardized Coefficients

Standardized Coefficients

Sig.

B (Constant) GDP current pakistan GDP growth pakistan 1 Inflation rate pakistan Exchange rate pakistan Total tax rate pakistan -48522015289.607 -.051 -164344347.527 352078759.371 367162177.568 652386632.291

Std. Error 3958486331.013 .010 235310743.387 60898667.679 30587941.382 92008683.803

Beta -12.258 -1.131 -.175 .809 2.721 1.927 -5.072 -.698 5.781 12.003 7.090 .007 .037 .557 .029 .007 .019

a. Dependent Variable: Foreign direct investment pakistan

Interpretation of results:
That table shows the results of Pakistan in which we discuss the standardized coefficients (Beta). In Pakistan GDP Current, GDP Growth Rate shows negative relationship with FDI. Inflation Rate, Exchange Rate, Total Tax Rate shows positive relationship with FDI. That table also shows sig value or p-value which is actually compared with level of significance assumes 5%. But after checking the results shows there is significant except GDP Growth. Its means there are four independent variables which explains dependent variable.

Hypothesis:
H0 : GDP Current is not significant. H1 : GDP Current is significant. Rejected H0 H0 : GDP Growth is not significant. H1 : GDP Growth is significant. Accepted H0 H0 : Inflation Rate is not significant. H1 : Inflation Rate is significant. Rejected H0 H0 : Exchange Rate is not significant. H1 : Exchange Rate is significant. Rejected H0 H0 : Total Tax Rate is not significant. H1 : Total Tax Rate is significant. Rejected H0

Conclusion:
In these three Asian pacific countries {Pakistan, Malaysia, Indonesia} we make a cross sectional study. Here we study the relationship of FDI with GDP Current, GDP Growth Rate, Inflation Rate, Exchange Rate and Total Tax Rate. Above results shows only in Pakistan GDP Current, Inflation Rate, Exchange Rate and Total tax rate are significant. GDP Growth rate results insignificant but in Malaysia and Indonesia table shows insignificant results. In Pakistan FDI outflow is less than Indonesia in last year but in Malaysia FDI inflow is greater than Pakistan and Indonesia. Total Tax Rate in Pakistan is high according to Indonesia and specially Malaysia. In Malaysia Net FDI is positive but selected independent variables only 59.1% variations explain.