How Does Foreign Direct Investment Affect Economic Growth

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Jose De Gregorio Jong-Wha Lee

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Keywords: Foreign investment ; Economic growth ; Developing countries ; Economic models ; Other versions of this item:


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Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June. [Downloadable!] (restricted) Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)

This item is featured on the following reading lists: 2. Inflow Of Funds Through Foreign Direct Investment In India- Analysis

Enclosed please find an abstract and paper on 'Inflow of Funds through Foreign Direct InveINFLOW OF FUNDS THROUGH FOREIGN DIRECT INVESTMENT IN INDIA – Analysis for your kind perusal and to become a subscriber in this site. thanks. M.Ganesh, Faculty in MBA, Thanthai Hans Roever College, Perambalur and K.Soundarapandiyan, Faculty in MBA, Sri SaiRam Engineering College Chennai-44 ABSTRACT Foreign Direct Investment (FDI) is considered to be the lifeblood for economic development as far as the developing nations are concerned. Since the liberalization of the Indian economy inflows of foreign direct investment has greatly increased. As far as forting direct investment is concerned, its flow in India is very small as compared not only to China but also to India's potential. Economic Survey for 2005-06 points out that India has potential to absorb $150 billion FDI in the infrastructure sectors alone by 2010.Most of the FDI inflows come from a few countries. Between 1991 and 2005, investments of 10 countries accounted for 71 percent of FDI, the main investor countries being the USA, the Netherlands, Japan, and the United Kingdom. With regard to FDI, U.S. is one of the largest foreign direct investors in India. India is becoming an attractive

location for global business on account to its buoyant economy, its increasing consumption market, and its needs in infrastructure and in the engineering sector. Opening and FDI have really created new opportunities for India's development and boosted the performances of local firms as well as the globalization of some of them. Such a trend has undeniably raised Indian's stature among developing countries.

FDI Investment Incentive System and FDI Inflows: The Philippine Experience
Research Paper Series (Philippine Institute for Development Studies) | July 1, 2007 | Aldaba, Rafaelita M | Copyright Philippine Institute for Development Studies 2008. This material is published under license from the publisher through ProQuest Information and Learning Company, Ann Arbor, Michigan. All inquiries regarding rights should be directed to ProQuest Information and Learning Company. (Hide copyright information) Copyright

Abstract This paper examines the country's investment incentive program for foreign investors and its success in attracting substantial FDI inflows. The analysis compares the FDI incentive system and FDI performance of the Philippines with other Asian countries. Since it is difficult to untangle the effect of tax incentives from other factors, the analysis also takes into account other factors such as level of competitiveness, costs of doing business, and availability of infrastructure. Our experience tends to suggest that in the absence of fundamental factors such as economic …

Agglomeration Effects in Foreign Direct Investment and the Pollution Haven Hypothesis

Ulrich J. Wagner

Universidad Carlos III de Madrid - Department of Economics; London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)
Christopher Timmins

Duke University - Department of Economics

Environmental and Resource Economics, Forthcoming Economic Research Initiatives at Duke (ERID) Research Paper No. 22 Abstract: Does environmental regulation impair international competitiveness of pollution-intensive industries to the extent that they relocate to countries with less stringent regulation, turning those countries into "pollution havens"? We test this hypothesis using panel data on outward foreign direct investment (FDI) flows of various industries in the German manufacturing sector and account for several econometric issues that have been ignored in previous studies. Most importantly, we demonstrate that externalities associated with FDI agglomeration can bias estimates away from finding a pollution haven effect if omitted from the analysis. We include the stock of inward FDI as a proxy for agglomeration and employ a GMM estimator to control for endogenous, time-varying determinants of FDI flows. Furthermore, we propose a difference estimator based on the least polluting industry to break the possible correlation between environmental regulatory stringency and unobservable attributes of FDI recipients in the cross-section. When accounting for these issues we find robust evidence of a pollution haven effect for the chemical industry. Keywords: agglomeration effects, congestion effects, environmental regulation, foreign direct investment, German manufacturing, panel data, pollution havens

Determinants of foreign direct investment at the regional level in China Session Marked List

Article Information: Title: Determinants of foreign direct investment at the regional level in China Author(s): Lv Na, W.S. Lightfoot Journal: Journal of Technology Management in China Year: 2006 Volume: 1 Issue: 3 Page: 262 - 278 ISSN: 1746-8779 DOI: 10.1108/17468770610704930 Publisher: Emerald Group Publishing Limited

Emma (2007): Bilateral Investment Treaties and Foreign Direct Investment: Correlation versus Causation. I find that the initially strong correlation between BITs and investment flows is not robust controlling for selection into BIT participation. I explicitly model and empirically account for the endogeneity of BIT adoption. I also test for a signaling effect from BITs.Requires a PDF viewer such as GSview. Furthermore.500 bilateral investment treaties (BITs) that have been signed since 1980. Item Type: MPRA Paper .and middle-income countries. My results show the importance of accounting for the endogeneity of adoption when assessing the benefits of investment liberalization policies. Unpublished. Using data on bilateral investment outflows from OECD countries. I find no evidence for the claim that BITs signal a safe investment climate. Full text available as: PDF . Xpdf or Adobe Acrobat Reader 400Kb Preview Abstract The rapid and concurrent increase in both foreign investment and government efforts to attract foreign investment at the end of last century makes the question of causality between the two both interesting and challenging. In contrast to previous studies that have found a strong effect from BIT participation. I take up this question for the case of the nearly 2.Bilateral Investment Treaties and Foreign Direct Investment: Correlation versus Causation Aisbett. I test whether BITs stimulate investment in twenty eight low.

Carr. International Business F . The effects of bilateral tax treaties on U. American Economic Review 91.: 2006. C. American Economic Review 93. Estimating the knowledge-capital model of the multinational enterprise: Comment. A review of the empirical literature on FDI determinants. FDI activity..International Investment. Nov 2007 02:21 References: Baldwin.International Economics > F2 .: 2005. Journal of Applied Econometrics 7. and Wang. S. and Taglioni. E. 243–257.. A. Baltagi. B. J.. K. and vanWijnbergen. and Wu.International Factor Movements and International Business > F23 . Davies.International Economics > F2 .International Factor Movements and International Business > F21 . Econometric Theory 15.Multinational Firms. 980–994. 601–622.: 1999. Unequally spaced panel data regressions with AR(1) disturbances. R. Taxation of foreign . NBER Working Paper 11299. B. Bhargava. R. Foreign Direct Investment. K.: 2004. Serial correlation and the fixed effects model. D. and Davies.International Factor Movements and International Business > F20 .International Economics > F2 . R. Developing Countries Subjects: F . Markusen.: 1994. Estimating the knowledge-capital model of the multinational enterprise.Institution: University of California at Berkeley Language: English Keywords: International investment agreements. Long-Term Capital Movements F . Doyle. H. B.: 2001. W. International Tax and Public Finance 11. and Head. B.: 1992.: 2004.S. Blonigen.: 2003. P.General ID Code: 2255 Deposited By: Emma Aisbett Deposited On: 15. and Maskus. Blonigen. Blonigen. NBER Working Paper 12516. Franzini. Gravity for dummies and dummies for gravity equations. R. X. NBER Working Paper 10378. 693–708. Blonigen. D. M. B. and Narendranathan. L. Inappropriate pooling of wealthy and poor countries in empirical FDI studies. Mar 2007 Last Modified: 07. 814–823. A.

E. Y. Bilateral FDI flows: Threshold barriers and productivity shocks. M. and Rubinstein. Yale Law School Center for Law. A.: 2005.: 1982. World Development 33(10).. 1960-2000. and Verbeek. Helpman. and Yeaple.: 2005. K. Trading partners and trading volumes. The standardization of law and its effect on developing economies.: 2004.: 2001.: 1983. Working Paper.. Rose. Hallward-Driemeier. European Journal of International Law 16(4). and Simmons. D. Attracting FDI in a politically risky world. E. A. E. The American Journal of Comparative Law 50(1). Neumayer. Biometrika 70. Rosenbaum. Foreign direct investment and the business environment in developing countries: The impact of bilateral investment treaties. Janeba. Melitz. Economics and Public Policy Research .: 2004. 1567–1585. Export versus FDI with heterogeneous firms. Tobin. International Economic Review 43(4). Nijman. E. Do BITs really work? an evaluation of bilateral investment treaties and their grand bargain. S. 89– 114.: 2005. 41–55. T. Helpman. B. and Spess. M. International Tax and Public Finance 1994(1). NBER Working Paper 11639. and Sadka. J. S.: 2003.multinationals: a sequential bargaining approach to tax holidays. J. and Tong. and Rubin. Y. Pistor. Guzman. Harvard International Law Journal 46(1). Guzman. Z. 533–549. A. Do bilateral investment treaties increase foreign direct investment to developing countries?. Rubinstein. The design of international agreements. Elkins. M. M. World Bank Policy Research Paper WPS 3121. E.: 2005. N.: 2004. The Review of Economic Studies 49(4). A. Salacuse. H. Razin. 1127–1155. Which countries export FDI.: 2002. Kyklos 54. Razin.: 2002. and Rose-Ackerman. Do bilateral investment treaties attract FDI? Only a bit and they could bite. and Sullivan. The determinants of foreign direct investment: sensitivity analyses of cross-country regressions. UC Berkeley Public Law Research Paper No. 300–316. and how much? NBER Working Paper 10145. The central role of the propensity score in observational studies for causal effects. Melitz. 578961.: 2004. Competing for capital: The diffusion of bilateral investment treaties.: 2003. 579–612. Sadka... E. American Economic Review 91(1). A. L. Nonresponse in panel data: the impact on estimates of a life cycle consumtion function.. 211– 225. P. 97–130.

purchase a business or buy real estate. WORLD INVESTMENT REPORT 2001 . This involves a flow of capital from one country to another to build a factory.oppapers. The MIT http://www.Paper No. IIAMonitor Number 2 (2006). enhance exports and contribute to the long-term economic development of the world's developing .com/topics/pros-and-cons-of-fdi-in-higher-education/0 http://www.D. UNCTAD: 2001.0 Introduction Throughout the production of this report I will aim to explain an analysis of the costs and benefits of foreign direct investment for New Zealand both in theoretical and empirical terms. In New Zealand foreign direct investment plays a pivotal part in the country's economy growth. UNCTAD: 2006b.3 billion for the year ending March 2001.2.pdfqueen. M. transfer skills and technology. Econometric Analysis of Cross Section and Panel Data. J. raise productivity.afsc. but foreign direct investment can be described as: "Foreign Direct Investment is the purchase by the investors or corporations of one country of non-financial assets in another country. UNCTAD: 2005.peerpapers.I in New Zealand has increased substantially and that FDI stocks have risen from around NZ$ 300 million in 1981 (pre-economic reforms) to NZ$49. UNCTAD: 2006a.html research papers on cost of servicing in Foreign Direct Investment Costs And Benefits Of Foreign Direct Investment For New Zealand New Zealand – Report 1. When it comes to defining FDI different countries may define it differently and because of this it is arbitrary.htm). Developments in international investment agreements in 2005." (http://www.Promoting Linkages. Recent developments in international investment agreements. this will be looked at in more detail in section http://www. Wooldridge.: 2002. "Foreign direct investment (FDI) has the potential to generate employment. WORLD INVESTMENT REPORT 2006 . IIA Monitor Number 2.FDI from Developing and Transition Economies: Implications for Development. UNCTAD. this is shown by the fact that over the past two decades the flow of F.

They found that high exchange rate volatility discouraged FDI while the.countries.. These studies exposed that the appreciation of the home currency vis-à-vis the host currency encouraged FDI from the home country to the host country. Bénassy-Quéré. or emerging In practice the term is used interchangeably with Multinational Corporation". . Exchange Rate. Exchange Rate Volatility and Foreign Direct Investment. but it became far more common after World War II and today it may be difficult to find a. (2) Untying the Gordian knot: The Multiple Links Between Exchange Rates and Foreign Direct Investment.Révil (2001) investigated the impacts of exchange rate volatility.. Exchange Rate Volatility And Fdi INTRODUCTION Foreign Direct Investment brings various benefits to both investing countries. FDI transfers not only financial resources. (http://www-personal. FDI are very important for developing countries.umich. on FDI from developed to developing countries for the 1984–96 periods by using annual data. or host countries. More than ever.C. Yoshimura and Kiyota (2003) examined the impacts of exchange rate on Japan’s FDI for different periods. (3) Exchange Rate Volatility and Foreign Direct Investment. and recipient countries. 2.. usually a corporation that operates in two or more countries. to grow such as G. For this reason. I tried to study the relationship between FDI and exchange rate volatility and observe how exchange rate changeability could affect the FDI positively or negatively. but also technology and managerial know-how from home countries to host countries. (4) Why is China so Attractive for FDI? (5)The Role of Exchange Rates. Exchange Rate Volatility and Foreign Direct Investment By: Kozo Kiyota and Shujiro Urata Literature review Several empirical studies confirmed the strong impacts of exchange rate on FDI. or home countries. I have chosen five academic papers which are related to FDI and currency exchange rate variability and I tried to present them in the following: (1) Exchange Rate.C countries and some Asian countries. Therefore. In this paper.html) The phenomenon of multinationals is not entirely recent as you can go back to before World War I and see that American firms had factories in foreign countries..0 Multinational Enterprises A Multinational can be defined as the following: "A firm. Fontagné and Lahrèche. which was measured by the coefficient of variation of quarterly nominal exchange rate over the past three years. Exchange Rate Volatility and Foreign Investment: International Evidence. countries at all levels of development seek to leverage FDI for development" .

To evade the trade barrier. area headquarters..oppapers. 5. on the other hand. operation headquarters. The capital internationalization includes two dimensional contents: on one hand. Evaluate The Costs And Benefits To Modern Business From Engaging In Foreign Direct Investment. various economic elements of modern commerce such as: labor. FDI is the effective way to evade the international trade barrier The global economic integration is the main trend of the development of current world economy. http://www. To speed up the enterprise's globalization course. To transfer the domestic superfluous production and technology capacity of the host country. Along with the constant deepening of modern international trade . You can browse our collection of term papers or use our search engine. We have many premium term papers and essays on Evaluate The Costs And Benefits To Modern Business From Engaging In Foreign Direct Investment. goods. 4. Especially the capital internationalization whose main form is international direct investment is the most frequent. are always applied themselves to promoting the trade liberalization and reducing the tariff wall among the countries. promote the internationalized operation of the enterprise and reinforce or improve the international competition advantage of the enterprise. such as WTO. it's also an international of enterprise organization structure. service and capital Evaluate The Costs And Benefits To Modern Business From Engaging In Foreign Direct Investment. capital headquarters or branch institution. it's an international of investor structure. including the internationalization of enterprise headquarters.. 3. To study the latest foreign technology. management and marketing experience. 2. We also have a wide variety of research papers and book reports available to you for free. have begun to span the geological border of each country and been widely circulated in the world under the promotion of the globalization. According to the foreign direct investment questionnaire made by Ministry of Commerce in Chin in March of 2006. To explore foreign market to drive the export.oppapers.http://www. The above two internationalizations supplement each other.. The advantages brought by FDI on the modern enterprise operation: 1. Some international organizations. To develop the foreign resource.. develop the transnational operation network of the enterprise. the current purposes of Chinese enterprises on the foreign direct investment include: 1. 6.

pdf File Format: application/pdf File Function: Download Restriction: no dow nload the selected file Bottom of Form Publisher Info Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 0708. The following formats are available: HTML (with abstract). Oxford OX1 1HP UK Phone: +44 (0)1865 288800 .uk/centres/tax/Documents/working_papers/WP0708. CEPR and CESifo) Additional information is available for the following registered author(s): • Christian Keuschnigg Abstract This paper develops a model of a monopolistically competitive industry with extensive and intensive business investment and shows how these margins respond to changes in average and marginal corporate tax rates. Information about this may be contained in the File-Format links below. The paper derives comparative static effects of the corporate tax and shows how the cost of public funds depends on the measures of effective marginal and average tax rates and on the behavioral elasticities of extensive and intensive investment. RefMan. Intensive investment refers to the size of a firm’s capital stock. Top of Form RePEc:btx:w pape File URL: http://www.Keuschnigg@unisg. RIS ( In case of further problems read the IDEAS help page. plain text (with abstract). Please be patient as the files may be large. Foreign Direct Investment and the Costs of Corporate Taxation Author info | Abstract | Publisher info | Download info | Related research | Statistics Author Info Christian Keuschnigg ( Christian. Download (University of St.Gallen (IFFHSG). Download Info To download: If you experience problems downloading a file. Note that these files are not on the IDEAS site. Extensive investment refers to the firm’s production location and reflects the trade-off between exports and foreign direct investment as alternative modes of foreign market access. check if you have the proper application to view it first. ReDIF Length: Date of creation: 2007 Date of revision: Handle: RePEc:btx:wpaper:0708 Contact details of provider: Postal: Park End Street. ProCite).ox.

uk (Simon Loretz)." University of St. contact: simon..Firm Organization and Market Structure FDI In Services And Market Access: A Paradox Of Trade Liberalization Topics: Foreign Direct Investment Tags: Currency & Foreign Exchange. Christian. and the costs of corporate taxation. "Exports... and Market Performance . Foreign Direct Investment and the Costs of Coporate Taxation. . Size Distribution of Firms L22 . [Downloadable!] (restricted) Christian Keuschnigg. extensive and intensive investment. Foreign Direct Investment (FDI). Pricing. and Behavior ." CEPR Discussion Papers 5769. foreign direct Related research Keywords: Exports. pages 460477. 2008. Foreign Direct Investment and the Costs of Corporate Taxation. C.Industrial Organization .ac. or to correct its listing. Firm Strategy.. 2007. . University of St. Foreign Direct Investment. "Exports. Gallen. effective tax More information through EDIRC For technical questions regarding this item." CESifo Working Paper Series CESifo Working Paper No. vol. [Downloadable!] Christian Keuschnigg..Business Taxes and Subsidies L11 .Production and Organizations . Discussion Papers.. corporate taxation. 15(4).Industrial Organization .Taxation. Department of Economics. costs of public funds.loretz@sbs. Organization..ox. Foreign Direct Investment and the Costs of Corporate Taxation." FIW Working Paper series 005...Fax: +44 (0)1865 288805 Web page: http://www. "Exports.Firm Behavior F23 .Firm Objectives." International Tax and Public Finance. [Downloadable!] Christian Keuschnigg. FIW. "Exports. Other versions of this item: • Article ○ • Paper Christian Keuschnigg.. "Exports.International Economics . [Downloadable!] (restricted) ○ ○ ○ ○ Find related papers by JEL classification: D21 . International Business H25 .E. Springer. and Market Structure.International Factor Movements and International Business . 2006.Multinational Firms.Microeconomics . 2006. Gallen Department of Economics working paper series 2006 2006-17. CESifo Group Munich. Finance. . August.P..ox.Public Economics . foreign direct investment.Market Structure.. and Revenue . [Downloadable!] Keuschnigg. Foreign Direct Investment and the Costs of Corporate Taxation.

Since some services are market-specific and have non-tradable (Is this item miscategorized? Does it need more tags? Let us know. Investment. this paper investigates interaction between trade liberalization in goods and liberalization in service FDI (Foreign Direct Investment). a foreign firm has a higher cost in service provisions compared to its domestic competitor and it can overcome the disadvantage by either outsourcing services to the domestic competitor or making service FDI.) Format: PDF | Size: 365KB | Date: Dec 2006 | Pages: 33 http://jobfunctions. strategic controls and export intensity of foreign-invested firms in transition economies . Microsoft Access.aspx?docid=314107 NEWS AND VIEWS Impact of foreign ownership on innovation European Management Review Research Note RESEARCH FDI by firms from newly industrialised economies in emerging markets: corporate governance. entry mode and location Journal of International Business Studies Article Ownership structure.Free Trade. When the cost of service FDI is high enough.bnet. Outsourcing Source: Hitotsubashi University Top of Form http://jobfunctions Bottom of Form • • E-mail this page Related Content FREE Registration is required Overview: In an international oligopoly model. Liberalization. trade liberalization under service outsourcing may have an anti-competitive effect and benefit both domestic and foreign firms at the expense of consumers.

(2008) What is the environmental performance of firms overseas? An empirical investigation of the global gold mining industry.2006.S. Korea sblee@kiep. (2010) Environmental Regulation and Industry Location in Europe. Timmins. we allow for differences in states' industrial Abstract There is an ongoing debate on whether benefits of foreign direct investment (FDI) differ depending on the modes of FDI entry. CrossRef Roberto A. 231-256 Online publication date: 1-Jun-2009.3. CrossRef Ulrich Mikyung Yun School of International Studies Catholic University of Korea 43-1 Yeokgok 2-dong. 115-135 Online publication date: 1-Feb-2009. 289-313 Online publication date: 1-Nov-2008. The paper thus argues against any provision of preferential incentives based on modes of entry. Environmental and Resource Economics 41:3. (2008) Pollution Control and Foreign Direct Investment in Mexico: An Industry-Level Analysis. 137-747.S.Journal of International Business Studies Article Chinese FDI in Sub-Saharan Africa: Engaging with Large Dragons European Journal of Development Research Original Article http://www. 129-143 Online publication date: 1-Oct-2008. States Wolfgang Keller University of Texas Arik Levinson Georgetown UniversityThis paper estimates the effect of changing environmental standards on patterns of international investment. CrossRef Abay Mulatu. we avoid comparing different countries by examining foreign direct investment in the United States and differences in pollution abatement costs among U. Data on environmental costs in U. allowing us to control for unobserved state characteristics. Third. Dan Rigby. De Santis. states are more comparable than those for different countries. The paper adopts a new. Journal of Productivity Analysis Seoul. Seocho-gu.go. Christopher D. Wonmi-gu Bucheon. an acknowledged problem for earlier studies. Review of Environmental Economics and Policy 4:1. we employ an 18-year panel of relative abatement costs.171?prevSearch=allfield%253A%2528FDI%2529&searchHistoryKey= Pollution Abatement Costs and Foreign Direct Investment Inflows to U.html Does FDI Mode of Entry Matter for Economic Developments of a Host Country? The Case of Korea Seong-Bong Lee Korea Institute for Economic Policy. 459-479 Online publication date: 1-Apr-2010. Cited by J. (2009) Agglomeration Effects in Foreign Direct Investment and the Pollution Haven Hypothesis. CrossRef Andreas Waldkirch. . First.5. http://www. more accurate classification scheme than the current official classification system and finds that there is little difference in firm-level performance according to FDI mode of entry. We find robust evidence that abatement costs have had moderate deterrent effects on foreign investment.S. Environmental and Resource Economics 43:2. CrossRef L. This paper examines this debate using firm-level data on FDI in Korea. and U. Gyeonggi-do.mitpressjournals. G.palgrave-journals. (2010) Should Trade Agreements Include Environmental Policy?.ac. Ada Wossink. Journal of Economic Geography Online publication date: 2-Feb-2010. Environmental and Resource Economics 45:4. Tole. Korea mkyun@catholic. states. Second.S. Koop. Ederington. German Economic Review 10:1. Reyer Gerlagh. 300-4 Yomgok-dong.1162/asep. 84-102 Online publication date: 1-Dec-2010. CrossRef Gary 420-743. Frank Stähler. The analysis advances the existing literature in three ways. (2010) Do environmental regulations affect the location decisions of multinational gold mining firms?. states are more similar in other difficult-to-measure dimensions. Lise Tole. Munisamy Gopinath. (2009) Foreign Direct Investment and Environmental Taxes. Wagner.

R. Pereira University College London Matthew J. (2007) Regulatory Competition and Environmental Enforcement: Is There a Race to the Bottom?. AIM. CrossRef Matthew A. we estimate a robust and significantly positive correlation between a domestic plant's TFP and the foreign-affiliate share of activity in that plant's industry. Scott Taylor. Haskel Queen Mary. R. Online publication date: 1-Dec-2007. 189-205 Online publication date: 25-Feb-2008. CrossRef Erik Dietzenbacher.CrossRef A. Economic Development and Cultural Change 53:4. Millimet. 7-71 Online publication date: 1-Mar-2004. CrossRef Paroma 281-296 Online publication date: 1-Jul-2003. R. 87-102 Online publication date: 1-Mar-2006. Robert J. how much should host countries be willing to pay to attract FDI? To examine these questions. CrossRef Matthew A. Review of Development Economics 9:4. CrossRef David M. and the Environment. Environment and Development Economics 12:06. Elliott. 530-548 Online publication date: 1-Nov-2005. CrossRef WENHUA DI. we use a plant-level panel covering U. (2008) Are ASEAN Countries Havens for Japanese Pollution-Intensive Industry?. American Journal of Political Science 51:4. 427-449 Online publication date: 28-Feb-2007. Kenichi Shimamoto. 853-872 Online publication date: 1-Oct-2007. Consistent with spillovers. (2004) Trade.K.mitpressjournals. 236-254 Online publication date: 1-Feb-2008.1162/003465302760556503?prevSearch=allfield%253A%2528FDI%2529&searchHistoryKey= Does Inward Foreign Direct Investment Boost the Productivity of Domestic Firms? Jonathan E. Konisky. Elliott. 157-178 Online publication date: 1-Mar-2006. CrossRef Brian R Copeland. (2008) Institutional Design and Information Revelation: Evidence from Environmental Right-to-Know. Robert J. (2007) Pollution abatement cost savings and FDI inflows to polluting sectors in China. Contemporary Economic Policy 21:3. (2006) Endogenous Pollution Havens: Does FDI Influence Environmental Regulations?*. (2003) Environmental Abatement Costs and Establishment Size. Per G. Slaughter Tuck School of Business at Dartmouth and NBER PDF (127. Elliott. Business Strategy and the Environment 15:2. CrossRef Robert J. Óscar González-Benito.372 KB) PDF Plus (138. Cole. Scandinavian Journal of Economics 108:1. (2007) An Empirical Examination of the Pollution Haven Hypothesis for India: Towards a Green Leontief Paradox?. manufacturing from 1973 through 1992. B. 825-854 Online publication date: 1-Jul-2005. Environmental and Resource Economics 36:4. (2006) A review of determinant factors of environmental proactivity. Kakali Mukhopadhyay. CrossRef Javier González-Benito. Cole. (2005) FDI and the Capital Intensity of "Dirty" Sectors: A Missing Piece of the Pollution Haven Puzzle. The World Economy 31:2. Journal of Economic Literature 42:1. Whitford. (2005) Labor Disputes and the Economics of Firm Geography: A Study of Domestic Investment in India. and CEPR Sonia C. CrossRef Daniel L.103 KB) Abstract Are there productivity spillovers from FDI to domestic firms. Growth. Nidhiya Menon. . if so. and. CrossRef http://www. University of London. Fredriksson. Journal of Public Administration Research and Theory 19:2. M.

Javorcik. Yingqi Wei. Economics of Transition 18:1. CrossRef Carlo Altomonte. 2005 Author: Herman. The World Bank Research Observer 23:2. Scandinavian Journal of Economics 111:4. in some cases several times less.(foreign direct investment) Article from: Journal of International Business Research Article date: January 1. This material is published under license from the publisher through the Gale Group. Darla. where the returns on investment can be higher than in developed countries. host country. This paper also provides an overview of the current trends in FDI flows and the relationship between FDI. Farmington Hills. Enrico Pennings.mitpressjournals. 350-359 Online publication date: 1-Feb-2010. The purpose of this paper is to examine both the positive and negative effects of FDI inflows to developing countries in areas of politics. All inquiries regarding rights or concerns about this content should be directed to customer service. Evis Sinani. 143182 Online publication date: 1-Jan-2010. Defined. Papers in Regional Science 88:3. INTRODUCTION Foreign Direct Investment (FDI) is the single most important instrument for the globalization of the international economy. it is acquiring assets such as land and equipment in another. technology. Michelle. (Hide copyright information) ABSTRACT The last decade has seen an explosion in Foreign Direct Investment (FDI) especially in developing countries.1162/rest. Journal of International Business Studies 40:7. Jozef Konings. (2009) Do local manufacturing firms benefit from transactional linkages with multinational enterprises in China?. CrossRef B. (2010) FDI spillovers in new EU member states. CrossRef Nigel Driffield. CrossRef Nuno This increase in FDI has had major effects on the social welfare of the citizens of developing host-countries. Chengang Wang. Cited by Marcella Nicolini. 591-607 Online publication date: 1-Aug-2009. (2009) Foreign Direct Investment and the Incentives to Innovate and Imitate*. Michigan.400 in 2000 prices ($4. FDI is . Journal of International Business Studies 41:2. 1131-1148 Online publication date: 1-Sep-2009.89. These calculated values appear to be less than per-job incentives governments have granted in recent high-profile cases. Journal of International Business Studies 40:7. LLC. finance. Cheryl Long. (2010) FDI spillovers in the Chinese manufacturing sector. 1113-1130 Online publication date: 1-Sep-2009. Hadley COPYRIGHT 2008 The DreamCatchers Group. Stefano Menghinello. Isabel Proença. industry raises the TFP of that industry's domestic plants by about 0. (2009) FDI spillovers at regional level: Evidence from Portugal. James H Love. 1075-1094 Online publication date: 1-Sep-2009. CrossRef Filip Abraham.Typical estimates suggest that a 10-percentage-point increase in foreign presence in a U. environment and culture. CrossRef Irene Brambilla. Veerle Slootmaekers.482?prevSearch=allfield%253A%2528FDI%2529&searchHistoryKey= Article: FDI and the effects on society. Leavell. CrossRef Klaus E Meyer.300). (2009) Domestic plant productivity and incremental spillovers from foreign direct investment. (2009) When and where does foreign direct investment generate positive spillovers? A meta-analysis. CrossRef http://www. 835-861 Online publication date: 1-Dec-2009.3. We also use these estimates to calculate the per-job value of these spillovers at about £2. to determine whether or not FDI contributes to the well-being of society. but operating the facility from the home country. CrossRef Xiaming Liu. S.5%. Both developing and developed countries have liberalized their policies and introduced new policies to attract FDI inflows. Journal of International Business Studies 40:7. (2010) The multinational enterprise as a source of international knowledge flows: Direct evidence from Italy. Galina Hale. Laura Resmini. Economics of Transition Online publication date: 1-Feb-2010. and society. FDI is the investment of real assets in a foreign country. multinational corporations. Maria Paula Fontoura. Chisholm. society. (2008) Can Survey Evidence Shed Light on Spillovers from Foreign Direct Investment?. 139-159 Online publication date: 27-May-2008.

First. changes in the nature of global production including the internationalization of supply chains and the ideological shift to open market economies. Paloni. 2001).086 regulatory changes in the sample countries either loosened regulatory restrictions or provided new promotions and guarantees to attract FDI. Annual inflows to the developing countries grew by 250% during the 1980s and over five-fold (520%) during the 1990s. multinational corporations. It has even been suggested that FDI will eventually replace official development assistance to underdeveloped countries. The author provides several instances in which an MNC stepped in and provided foreign aid to developing countries in order to fill the gap that was created when Official Development Assistance was decreased. the increase in foreign investment resulted in rapid economic growth and social development. examines the effect of FDI on women's health. the failure of import substitution.2% in 1999 (UNCTAD. the global economy experienced a decrease in foreign investment flows. and Youssef. Yet the impact of foreign investment extends far beyond economic growth. Last. This article reports a cross-sectional analysis of the determinants of liberalization of policy affecting inflows of FDI into 116 developing countries during the decade from 1992-2001. the trend became pronounced and widespread during the early 1990s as increasing numbers of policy makers came to believe that integration into the world economy was a prerequisite to growth and development and that FDI from transnational corporations (TNCs) was the vehicle to accomplish that end. 1992-2001. such as deep-rooted social customs. Williamson believed that the process of intellectual convergence after the collapse of communism was reflected in ten economic rerforms: the seventh was liberalization of flows of foreign direct investment (FDI) (1). Arguments from both sides of the debate will be taken into account when assessing the true impact of FDI. Yet in unstable. and increased cultural tensions. declining levels of other forms of assistance increased reliance on FDI. The author argues that governments must address gender issues as well as implement official measures and institutional changes to facilitate women's inclusion into production and social systems. human rights abuses. In 1990 John Williamson concluded that there was a "Washington Consensus" about the desirability of openness to the world economy. It makes use of a data base provided by UNCTAD described below) that tracks liberalizing and restricting changes in eight categories of FDI policy by country over the ten year period. the late 1980s and early 1990s were characterized by a "de facto convergence" of government policy approaches towards FDI (Noorbakhsh. 2004). 2001). As foreign investment and globalization continues to increase. the collapse of socialism as an alternative. all but two of the countries included in this study were net liberalizers of FDI policy. political unrest. political. Between 1986 and 2000. developing countries desperately seeking to attract foreign investment can have undesirable outcomes. increasing from 15. Results provide strong support for the "rational" decision (or "opportunity costs of closure") argument and only limited support for the external pressure thesis. 85). p. relatively stable and often tangible flows of direct investment. and external pressure to adopt neoliberal economic policies either from the dominant power (the United States) or international organizations such as the World Bank or International Monetary Fund. . 2000). p.. developing country governments have gained confidence in their ability to maximize the benefits and minimize the liabilities of investment by TNCs (UNCTAD.4% in 1989 to 30. Most literature analyzes the relationships between FDI.029 of 1. along with proposals for reforms to current environmental standards. many developing countries had moved away from State directed. Kiss (2003) analyzes the situation in Hungary when the Hungarian government introduced elements of a parliamentary democracy and market economy that eventually led to the social and political exclusion of Hungarian women. The authors consider both sides of the debate on the existence of "pollution havens" and provide reasons why MNCs do not contribute to environmental pollution. This is due in part to the practices that are in place prior to receiving FDI inflows. In contrast to the negative view of FDI. underdeveloped countries. In spite of the decline. More recently after the September 11th terrorist attacks in the U. however. MNCs provide foreign aid to developing countries. As a result. among other factors. reaching $22. and environmental factors and examine all the effects of FDI in order to decipher the true long-term impact.S. technological spillovers and innovations. financial volatility. A majority of the literature analyzes one side or the other. Second. (3) A number of factors led to increased efforts by developing countries to attract flows of FDI. political practices. In a retrospective article. 31) concluded that a "sea change" had taken place in thinking about development: by the late 1980s.3% by the decade's end. For the positive effects of FDI to be realized by undeveloped countries. 1999). and governments. I He wrote at the start of a period characterized by the widespread liberalization of laws and regulations affecting flows of both portfolio capital and FDI (Brune et al. The author concludes that it is the interaction of governments and MNCs that will lead to economic growth and social prosperity through FDI. Jones and McNally (1998) provide insight into the environmental degradation that is caused by FDI. he argues that "my version of the Washington Consensus can be seen as an attempt to summarize the policies that were widely viewed as supportive of development at the end of two decades when economists had become convinced that the key to rapid economic development lay not in a country's natural resources or even in its physical or human capital. cultural. and the economic crises of the 1980s all played a role (Millner. the average annual growth rate of FDI was 25 percent. is reflected in dramatic increases in flows of FDI into developing countries during the late 1980s and the 1990s. The results of FDI on the global economy are complex and unpredictable. which includes policy liberalization. Two possible explanations of liberalization are suggested: policy makers' beliefs that attracting more foreign direct investment is in the best interests of their countries. in turn. Developing countries have been hit the hardest by the decline in FDI as foreign investment is being redirected to more developed countries. and increased employment. Both Kiss (2003) and Hippert (2002). authored a report on FDI and the environment for the World Wildlife Foundation. and various financial crises may have led to a preference for longer term. technological. laws and regulations. and influence public policy. there was increased recognition by policy makers that the bundle of assets and capabilities encompassed in FDI could contribute directly to growth and development of the national economy. a more balanced assessment that examines both sides of the debate is necessary. reflected the transition of the exsocialist to market economies after the "fall of the Wall". Introduction The 1991 World Development Report (World Bank. it is expected that FDI will continue to be the most significant tool for globalization. this article employs a cross-sectional regression methodology to analyze the determinants of liberalization of foreign direct investment policies in 116 developing countries from 1992 to 2001. By focusing on their roles as philanthropists and political activists. China and Ireland. environmental degradation. The author asserts that FDI and Multinational Corporations (MNCs) hamper the economic integrity and sovereignty of the developing world and states that it is women who bear the brunt of human rights abuses because of their social positions in developing countries. therefore one must think in terms of economic.viewed by many as necessary to stimulate the economies of both developed and underdeveloped countries. stocks of FDI as a percentage of GDP doubled during the 1990s.(foreign direct investment) The decade of the 1990s was characterized by widespread liberalization of laws and regulations affecting inflows of foreign direct investment in developing countries. Using a data base supplied by UNCTAD. At times FDI can be a catalyst for change to society as a whole. Rondinelli (2002) explores the public role and economic power of MNCs and the positive ways in which MNCs can influence governments and provide for the social welfare of host-country citizens. FDI inflows as a percentage of gross fixed capital formation in developing countries grew from 3. inwardly focused strategies towards an acceptance of both markets and integration into the world economy. major reforms in domestic policies must also take place. Increasing economic integration. While the motivations for this marked shift in policy are complex. In this scenario FDI can have numerous negative effects.. examining FDI from a social standpoint. The changes were overwhelmingly liberalizing: 95% of the 1. 254). level of human resource capabilities and trade openness are found to be the primary determinants of the propensity to liberalize. expand international trade and investment. provide a negative perspective on the impact of FDI in developing countries. they can vary from country to country. along with Mabey. The report provides instances of environmental degradation that occurred mostly in extractive industries.6% in 1990 to 14. 1994. The authors also state that in industries that are involved in resource extraction.086) were liberalizing rather than restrictive. such as job loss. LITERATURE REVIEW There is an abundance of literature regarding the impact of FDI on society. It is widely accepted that FDI inflows provide economic benefits such as increased competition. the success of the relatively open Asian economies. Hippert (2002). 1991. liberalization of domestic markets and macroeconomic stability (Gore. some evidence suggests that MNCs will relocate to countries where environmental regulations are lax or non-existent. such as Singapore. Ninety-five per cent of the changes in such policies over the decade (1. but rather in the set of economic policies that it pursued" (Williamson 2000. Again in 1998 McNalley. The purpose of this study is to examine the effects of FDI and to determine whether the benefits of FDI outweigh the costs. (2) While developing countries began to reduce or remove restrictions on FDI during the 1980s. In more developed countries. The liberalization of FDI policy was both cause and effect of the marked increase in integration of the world economy in the 1990s which. The author also discusses solutions to these problems that have failed because they have been primarily "top-down approaches. especially in parts of Mexico and Asia. Spar (1999). dramatic improvements in communication as a result of the digital/information revolution. social.9 billion in 1999. takes a neutral stance when discussing the complexity of the relationship between foreign direct investment and human rights and the ways in which FDI impacts society both negatively and positively. 2000. Williamson. … Article: The determinants of liberalization of FDI policy in developing countries: a cross-sectional analysis." and proposes that the only plausible solutions are to hold corporations accountable for their employees. in order to more accurately measure the situation. the results can be quite different. Last. p. Country size.

Dennis Quinn and Carla Inclan (1997) note that.. we would be able to curb the spread of terrorism. the findings may help business decision-makers improve their measurement of country risk through assessment of the influence of FDI on the host country's macroeconomic variables. while there has been a good deal of research on the consequences of financial openness.. introduce inappropriate technology and constrain managerial and technological spillovers to the host country. It can add to fixed capital formation and have a positive balance-of-payments impact without the risks of debt creation or the volatility associated with short term portfolio capital flows. Globerman and Shapiro.. (1) This has become even more crucial with the increasingly important role of civil society in developing countries. 2002).S. a process of diffusion. It can bring technology. p. 59)." (5) Thus. Furthermore. 2004. Thus. Loree and Guisinger.. know-how. exports. It constructed a data base of changes in seven categories of regulation affecting FDI. The question. However. Knowledge of the positive influence of FDI on growth could enable businesses to have a stronger negotiation position vis-a-vis the host country. business decision-makers care about the effects of FDI on exports and economic growth in a small developing country such as Morocco? This question may be answered by considering the negotiations that must take place before many governments of developing countries are willing to allow foreign firms to undertake investment. FDI further reduces risk by promoting economic growth and thereby increasing political stability through reduction of poverty.(Foreign direct investment) Article from: Business Economics Article date: April 1. As noted above. Garrett. Why should U. 2001 for a review). .S. however. it is possible that liberalization reflects a "rational" policy making process. Farmington Hills. and Arbelaez. On the one hand. more subtle forces at work to shape government preferences and perceptions?" Cohen's question certainly applies to the widespread liberalization of FDI policy in developing countries during the 1990s. 2003. FDI can have both malign and benign effects. business decision-makers could enhance their measurement of expected risks by estimating the effects of increased FDI to the host country. for example. External forces could include both coercive pressures to adopt neoliberal economic policies and/or emulation of actions taken in other comparable countries. single-mindedly competing within systemic constraints to maximize some objective measure of national interest? Or were other. A larger body of work examines the impact of administrative reform or liberalization of regulation on either inflow's of FDI or the FDI decision process (Gastanaga. Nugent and Pashamova. Trevino. This paper uses data from an Arab country. Discussing the globalization of financial markets. The recent rise in terrorist acts implies that country risk has significantly increased in some parts of the world. Stephen Golub (2003) presents a complex scheme summarizing liberalization of restrictions on inward FDI in OECD countries. ". 1995. Alvin Wint (1992). this paper shows that foreign direct investment (FDI) contributes to higher growth both directly and indirectly through its effects on exports. UNCTAD. and a generally increased climate of competition for FDI all contributed to the increase in liberalization. such as exports and GDP. On the other hand. managerial skills. and examines the relationship between FDI. one possibility is that policy makers in developing countries reacted independently to changed technological and economic conditions and decided that liberalization to promote increased inflows of FDI was in the national interest. reviews the liberalization of FDI regulation in ten developing countries and concludes that there can be a disconnect between formal liberalization and the actual implementation of the screening process. Mina N. The study concluded that there was "[A]n unmistakable liberalization of foreign direct investment policies in all categories of nations" over the 1980s. increasing costs of closure probably have been the major motivation for liberalization in the arena of foreign direct investment . its origins or determinants are much less well understood. we need to ascertain whether in ward FDI does indeed contribute to economic growth. Morocco. However. Daniels. A study by the United Nations Centre on Transnational Corporations in 1091 looked at changes in FDI policies in 46 developed and developing countries over the years 1977-1987. a "rational" decision to liberalize FDI policy assumes that the benefits of increased flows of FDI will outweigh the costs. This suggests that TNCs may play a major role in fighting poverty and terrorism and underscores the opportunities fostered for business involvement in promoting political stability through efficient allocation of corporate resources. There are few empirical analyses of the determinants of liberalization of laws and regulations affecting inflows of FDI.S. Noorbakhsh. firms often need to convince the host government of the range of benefits FDI could have on its country's economy. which would lead to significant cuts in foreign direct investment (FDI) to those countries. Drawing on the findings and the methodology in this paper.S. 1998. knowing the likely effects of FDI on economic growth improves the firm's negotiating position and increases its success. U. Jacques Morisset and Olivier Neso (2002) review administrative barriers to inflows of FDI in 32 least developed countries (LDCs). then. a decision that the benefits of increased flows of FDI are greater than the costs. crowd out domestic producers. (4) While there is a considerable literature dealing with the impact of tax concessions and other incentives to attract FDI (see Morisset and Pirnia. All inquiries regarding rights or concerns about this content should be directed to customer service. as Theodore Moran (1998) notes. It may lower domestic savings. As Geoffrey Garrett (2000. p. many analysts believe that there is a strong link between poverty and terrorism and that if we could reduce poverty. and economic growth. 2004 Author: Baliamoune-Lutz. 2001. 2000). is "two-handed". Paloni and Youssef. CopyrightCOPYRIGHT 1999 The National Association of Business Economists. p. While the author argued that the recession of the early 1980s. It can increase the efficiency of local firms and the competitiveness of local markets (Gastanaga. Thus. This material is published under license from the publisher through the Gale Group. It is also possible that policy-makers in developing countries responded to other "subtle" (or not so subtle) forces shaping their preferences and perceptions. What motivates liberalization? A "rational" decision process FDI can contribute to economic growth and development. Every economic argument. 278) asks a very relevant question about the motivations for state behaviour: "Were states operating as classic rational unitary actors. business activity abroad: foreign policy that contributes to reducing country risk benefits businesses abroad and increases expected profits. it appears there are important complementarities between U. foreign policy and U. Taylor 2000. with the largest number of policy changes per country occurring in the newly industrializing countries (UNCTC. External forces rather than a drive for efficiency may have motivated the widespread liberalization of FDI policy in developing countries during the 1990s (Cohen 1996. is the conditions … Article: Does FDI contribute to economic growth? Knowledge about the effects of FDI improves negotiating positions and reduces risk for firms investing in developing countries. the relative decline in the position of developing countries. Michigan. Policy makers can be influenced by actions taken in other states or external political pressure and still make "rational" decisions based on the perceived "national interest". 2001. 943) argues. The results also highlight the potential for FDI to contribute to political stability through efficient allocation of corporate resources. That is true for both capital flows in general and FDI in particular. the increased tightening of the market for loan finance to developing countries. (Hide copyright information)Using data from an Arab country. 1991. Benjamin Cohen (1906. technology and access to markets. including both restrictions and incentives. 1998. Sin and Leung. It is important to note that it is possible for these views to be complementary as well as competing. Javorick. Nugent and Pashamova. Transnational corporations (TNCs) devote special consideration to country risk.Liberalization of FDI policy In their path-breaking study of capital account liberalization. insofar as there is a connection. the literature dealing with FDI policy is considerably more modest. the empirical analysis focuses on the impact of liberalization on future flows of FDI rather than its determinants. drain capital from the host country. 1999).

Pondicherry University.P Ibrahim. skill acquisition and diffusion. India. it is important to examine empirically the main effects and determinants of FDI flows to Morocco. Malaysia. Currently. Pondicherry 605014. the evidence from standard Granger Causality test for rest of the ASEAN economies shows that there was no causality between FDI and GDP for Brunei Darussalam and Lao People's Democratic Republic. namely. FDI is increasingly being viewed as a major indicator of globalization. The Johansen Cointegration result establishes a long run relationship between FDI and Gross Domestic Product (GDP) for the five ASEAN economies. This influence was strengthened by the ability of TNCs to have large integrated operations around the world. Such investment involves both the initial transaction between the two entities and all subsequent transactions between them and among foreign affiliates. It contributes to introduction of new management practices and more efficient . The Moroccan case may serve as an example of how FDI promotes exports and economic growth in developing countries in general and the Middle East and North Africa (MENA) region in particular. Department of Economics. made possible by technological advances. Senior Professor. The empirical results of VECM exhibits a long run causality running from GDP to FDI for Indonesia. the test results show that there is a one-way short run Granger causal link from FDI to GDP and GDP to FDI. and driven by competition. FDI is widely viewed as an important catalyst for the economic transformation of the transition economies.S. Second. research on Arab countries is quite limited. Kalapet. and economic growth. stimulates technological change through technological diffusion and generates technological spillovers for local firms.P Srinivasan. exports. For Myanmar and Thailand. This paper tries to fill the void in the literature by using Moroccan data from 1973 to 1999 and a Granger-causality technique to explore the relationships between FDI. the United Nations Conference on Trade and Development (UNCTAD) states that "[e]nabled by increasingly liberal policy frameworks.M Kalaivani. Indonesia. E-mail: ecoibrahim@yahoo. respectively. the influence of TNCs has been increasing over the last three decades. the role of FDI as a source of capital and a major tool in the fight against poverty began to be emphasized due to the decline in official development" There are two major reasons for the growing interest in FDI in the last decade or so. globalization more and more shapes today's world economy. If this undertaking is successful. E-mail: kalaivani_eco@yahoo. Determinants of FDI Most developing countries have low saving … FDI and Economic Growth in the ASEAN Countries: Evidence from Cointegration Approach and Causality Test -. FDI implies that the investor exerts a significant degree of influence on the management of the enterprise resident in the other economy. In its World Investment Report (1995). Department of Economics. The most widespread belief among researchers and policy makers is that FDI boosts growth through different channels. Salem 636011. building an integrated international production system--the productive core of the globalizing world economy. both incorporated and -. Singapore and Johansen Cointegration technique followed by the Vector Error Correction Model (VECM) and standard Granger Causality test were employed to investigate the causal nexus between Foreign Direct Investment (FDI) and economic growth in Association of Southeast Asian Nations (ASEAN) economies. little research has been done on the linkages between the three variables in a single model. School of Management. Periyar University. School of Management. While FDI to developing countries has increased. official aid has been falling. FDI by transnational corporations (TNCs) now plays a major role in linking many national economies. Kalapet. Philippines and Singapore. investment in Morocco. 2000). the results reveal long run bidirectional causal link between GDP and FDI. As it eases the transfer of technology. there exists a large body of research on the links between FDI and economic growth and on the relationship between exports and growth. Given the proximity of the country to the European Union. For Malaysia and Vietnam.D Scholar. Pondicherry. it will make Morocco the second Arab nation (after Jordan) to have such an agreement with the United States. Department of Economics. Tamil Nadu. Pondicherry University. it is speculated that free trade with the United States will result mainly in higher -. the United States announced it was beginning a new round of negotiations on a free trade agreement with Morocco. Introduction Foreign Direct Investment (FDI) is an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate). It increases the capital stock and employment. Besides.In January 2003. However. E-mail: srinivas_eco@yahoo. First.D Scholar. Ph. FDI may be undertaken by individuals as well as business entities (UNCTAD. Philippines. foreign investment is expected to increase and improve the existing stock of knowledge in the recipient economy through labor training. Moreover. India. India. Thus.

Considerable research has been conducted on the subject. and Ram and Zhang. and O'hearn. in turn.. as a result of overly restrictive intellectual property rights and/or prohibitive royalty payments and leasing fees charged by the MNCs for the use of the `intangibles' (see Ramirez. Further. hinders growth..g. Research and development activities financed by MNCs also contribute to human capital in host countries. 1988. or at least keep up with their growth ".. Literature Review From the above theoretical arguments. 1996. thereby. On the other hand. One of the strongest statements in that connection was made by Romer (1993) who suggested that for a developing country that wishes to gain on the developed countries. 1992) considered FDI that would contribute significantly to human capital such as managerial skills and Research and Development (R&D).. This kind of capitalism based on the global division of labor causes distortion. These negative effects would be further compounded if the expected positive spillover effects from the transfer of technology are minimized or eliminated altogether because the technology transferred is inappropriate for the host country's factor proportions (e. of the most important and easily implemented policies to give foreign firms an incentive to close the idea gap. the neoclassical growth models of Solow (1956) typically ascribe negligible long run growth effects for FDI inflows and. 1987. such as Singer (1950). but still there exist conflicting evidences in the literature regarding the FDI-growth relationship. Early studies on FDI. The dependency school theory argues that foreign investment from developed countries is harmful to the long-term economic growth of developing nations. these inflows can only have short run impacts on the level of income. Lucas..organizations of the production processes which. enable these economies to grow in the long-term (Balasubramanyam et al. Bacha (1974) examined the effects of FDI by the US companies on the host country's growth. to let them make a profit from doing so. It asserts that First World nations became wealthy by extracting labor and other resources from the Third World nations. 1975. The advent of endogenous growth models (Romer.. it appears that the debate of whether FDI inflows are growth-enhancing or growth-retarding in the emerging economies remains largely an empirical question. sentenced to conditions of continuing poverty. The training courses influence most levels of employees from those with simple skills to those who possess advanced technical and managerial skills. while Saltz (1992) examined the effect of FDI on economic growth for 68 developing countries and also found a negative correlation . too capital intensive). when this is not the case. Bornschier. Prebisch (1968). 2000. and Mankiw et al. with its usual assumption of diminishing returns to physical capital. 1986. Griffin (1970) and Weisskof (1972) supported the traditional view that the target countries of FDI receive very few benefits because most benefits are transferred to the multinational companies. the FDI can exert a negative impact on economic growth of the recipient countries. and Blomstrom and Kokko 1998). Moreover. there is a direct relationship between inward FDI in relation to their size and economic development of a country. Multinational Corporations (MNCs) can have a positive impact on human capital in host countries through the training courses they provide to their subsidiaries' local workers. 1990). 1980. 1990. would improve productivity of host countries and stimulate economic growth. It also argued that developing countries are inadequately compensated for their natural resources and are. and increases income inequality in developing countries (Stoneman..The government of a poor country can therefore help its residents by creating an economic environment that offers an adequate reward to MNCs when they bring ideas from the rest of the world and put them to use with domestic resources". 2002). By and large. FDI flows may have a negative effect on the growth prospects of a country if they give rise to substantial reverse flows in the form of remittances of profits and dividends and/or if the MNCs obtain substantial tax or other concessions from the host country. and thus. leaving long run growth unchanged. Their results revealed a negative relationship between these two variables.

(2003) for 23 developing countries. On the other side. Mencinger (2003) for eight transition countries and Eric and Joseph (2006) for Ghana found that FDI has a negative impact on economic growth. On the other hand. Moreover. 148) points out: "whether FDI can be deemed to be a catalyst for output growth. Blomstrom et al. the recent study of Faras and Ghali (2009) shows that for most of the Gulf Cooperation Council (GCC) countries. Besides. The studies of Kasibhatla and Sawhney (1996) and Rodrik (1999) for the US reveal unidirectional causal relationship from economic growth to FDI. an endogenous growth model was developed that measures the influence of the technological diffusion of FDI on economic growth in 69 developing countries over two periods. Hansen and Rand (2006) for 31 developing countries. Some empirical studies indicate that higher economic growth will lead to greater FDI inflows into host countries. As De Mello (1999. other studies such as Carkovic and Levine (2002) for 72 developed and developing countries. Further. The empirical results reveal that the causality runs more from real GDP to FDI flows. p. 1970-1979 and 1980-1989. Similarly. (2008) for Malaysia revealed that FDI has a positive impact on GDP growth. In an empirical study by Borensztein et al. Aghion et al. De Mello (1999) used both time series and panel data from a sample of 32 developed and developing countries and found weak indications of the causal relationship between FDI and economic growth. and technological progress seems to be a less controversial hypothesis in theory than in practice. Feridun and Sissoko (2006) for Singapore and Har Wai Mun et al. Their results indicated that FDI had a significant positive effect on the economic growth of each selected country. Lensink and Morrissey (2006) for 87 countries. the empirical literature supports the modernization view that FDI can exert a positive impact on economic growth in emerging economies. Liu et al. (1998). The study of Pradhan (2002) for India estimated a Cobb-Douglas production function with FDI stocks as additional input variable ." In his study. Basu et al. Besides. (2001) also investigated the impact of FDI on economic growth of the ASEAN-five economies over the period 1970-1996 and found that there exists bidirectional relationship between the two variables. (2006) for 118 countries. Moreover. the relationship between FDI and domestic investment in these countries was complementary. Chakraborty and Basu (2002) for India had employed VECM to find the short run dynamics of FDI and growth for the years 1974-1996. Using a single equation estimation technique with annual data over the period 1960-1985 for 78 developing countries. Similarly. Saha (2005) for 20 Latin America and the Caribbean countries. Bende-Nabende et al. the other studies by Marwah and Tavakoli (2004) for Association of Southeast Asian Nations (ASEAN) four countries. Similarly.between FDI and growth. there is a weak but statistically significant causal impact of FDI inflows on economic growth. Nguyen Phi Lan (2006) for Vietnam and Mahmoud and Fatima (2007) for six GCC found the bidirectional causality between FDI and GDP. They found that FDI inflows positively influenced economic growth. Alam (2000) in his comparative study of FDI and economic growth for Indian and Bangladesh economies stressed that though the impact of FDI on growth is more in the case of Indian economy. Campos and Kinoshita (2002) examined the effects of FDI on growth for 25 Central and Eastern European and former Soviet Union economies. yet it is not satisfactory. and for 51 countries for the period 1983-1986. Tsai (1994) employed a simultaneous system of equations to test two-way linkages between FDI and economic growth for 62 countries for the period 1975-1978. capital accumulation. (2002) for China. Haddad and Harrison (1993) and Mansfield and Romeo (1980) found no positive effect of FDI on the rate of economic growth in developing countries. He found that two-way linkages existed between FDI and growth in the 1980s. (1992) showed a positive influence of FDI inflows on economic growth. Lumbila (2005) for 47 African countries. Jackson and Markowski (1995) found that economic growth has had a positive impact on FDI inflows in some Asian countries.

These individual measures are encouraged by various regional agreements and multilateral bodies to increase the competitiveness of the region in attracting FDI. Thailand. Malaysia. ASEAN economies focus their investment incentives exclusively on foreign firms.92 mn. granting of incentives. with a growing number of developing countries succeeding in attracting substantial and rising amounts of inward FDI. It revealed that Johansen's cointegration test and VEC model are the superior techniques to investigate the issue. Over the last two decades. Aside from the regional initiatives that have so far been made by ASEAN to increase FDI. reduction of business cost through lowered taxation. Still.512. Thus. and other investment facilitation measures. FDI has become increasingly important in the developing world. Understanding the causal relationships between FDI and economic growth should help policy makers of ASEAN to plan their FDI policies in a way that enhances growth and development of their economies. FDI flows into Brunei Darussalam have been volatile. Thus. the ASEAN countries have had a significant share of FDI inflows in the last three decades. The literature reviewed above pertaining to the causal nexus between FDI and economic growth in emerging economies is well-established. Table 1 presents the FDI inflows into ASEAN by host country. Like other developing countries. However. (2004) for India. Flows to the Philippines relented significantly in the early 2000s but rebounded somewhat in 2005 and picked up in the following years. market reforms. each ASEAN member country continues to devote its investment climate in accordance with regionally and multilaterally accepted principles through the new investment measures enacted individually. Besides. the study can be done by employing Johansen's cointegration test and VECM to investigate the causality between FDI and economic growth in the ASEAN countries. in that order) recorded the strongest FDI growth. The table reveals that the 2005 was a strong year for ASEAN with inflows of $60. An Overview of FDI Inflows into ASEAN Countries During the past two decades. Akinlo (2004) and Ayanwale (2007) for Nigeria. opening up of sectors for foreign investments. Habiyaremye and Ziesemer (2006) for Sub-Saharan African (SSA) countries and Jarita Duasa (2007) for Malaysia found no evidence of causal relationship between FDI and economic growth. The increasing FDI flows into ASEAN nations are reflective of increasing interest and confidence of investors in investing and doing business in the region. trade liberalization as well as more intense competition for FDI have led to reduced restrictions on foreign investment and expanded the scope for FDI in most sectors in the ASEAN countries. the VECM provides inferences about the direction of causation between the variables. Johansen's cointegration test examines the presence of (cointegrating) long run relationship between economic variables in the model. However. the results appear to be ambiguous. While FDI growth in 2007 differed considerably between countries. the newer ASEAN member countries in particular (Vietnam. 1995). Indonesia and Vietnam were the largest FDI recipients. together accounting for more than 90% of flows to the subregion.for the period 1969-1997 and found that the FDI stocks have no significant impact for the whole sample period. TABLE 1 . the other studies such as Bhat et al. Most of the studies employed cointegration test and VECM to examine the causal relationship between FDI and economic growth. Amongst developing world nations. A principal feature of cointegrated variables was that their time paths were influenced by the extent of any deviation from the long run equilibrium (Walter. Singapore is found to attract larger FDI among the member countries over the period 1997-2007. VECM that incorporates error correction term represents the percent of correction to any deviation in long run equilibrium in a single period and also represents how fast the deviations in the long run equilibrium are corrected. Myanmar and the Lao People's Democratic Republic. Similarly. These include the improvements of the overall investment policy framework. streamlining and simplification of the investment process.

Still. The first step in the analysis is to test for non-stationarity of the data series. Thus. In order to reach the goal to becoming an attractive investment destination. This is due to the fact that the Asian Financial Crisis in 1997 left severe implications to the ASEAN countries where majority of the countries achieved very low GDP growth rate. and then it picked up in 2005 and slowed down thereafter. Thus. Variables that are non-stationary can be made stationary by differencing the number of differencing (d) required to make the series stationary identifies the order of integration I(d). econometric methodology needs to verify the stationarity of each individual time series since most macro economic data are non-stationary. Singapore has the highest FDI openness to GDP amongst the ASEAN countries. Especially the ASEAN Investment Area (AIA) agreement signed on October 1998 was regarded as a significant milestone to stimulate the surge of FDI into ASEAN member countries. In the case of other transitional economies (Brunei. For Philippines and Laos. the continued success of schemes under the AIA agreement as well as effective measures regarding the establishment of ASEAN Free Trade Area (AFTA) among Intra. the greater FDI inflow into ASEAN nations is driven as a result of continued and pursued schemes under ASEAN cooperation agreements in order to become a global attractive FDI destination. It shows that FDI as a percentage of GDP in ASEAN economies seems to be relatively lower in 1991 except Singapore. they tend to exhibit a deterministic and/or stochastic trend. the GDP growth rate in the region still continues to grow at a slow pace. In fact. the ASEAN countries have shown the meager performance as compared to 1995. In 2001. the VECM can be employed to establish the Granger causal direction. Though the cointegration approach applies to non-stationary series.50% in 2007. Methodology Johansen's (1988) Cointegration and VECM were employed to examine the causal nexus between FDI and economic growth in ASEAN countries for the period 1970-2007. i. TABLE 2 Broadly speaking.As pointed out by Uttama (2005). and the recession in Japan. Johansen's cointegration test is employed to examine long run (cointegrating) relationship among the selected variables. For the purpose. During 2001 and 2003. Augmented Dickey-Fuller (1979) and Phillips-Perron (1988) tests were employed to verify the stationarity of the data series and to determine the order of integration of each of the data series studied. Myanmar and Thailand). Table 2 reports the FDI inflows as a percentage of GDP in ASEAN member economies.47 and 4. in 2001. VECM allows the modeling of both . Although ASEAN countries gradually recovered from the crisis in 1999. It is far from being conclusive in drawing any causal relationship.. Myanmar and Malaysia. a formal econometric analysis is required to empirically examine the FDI-GDP relationships for our sample countries. it also relented significantly in the early 2000s but rebounded in 2006. FDI openness to GDP for Vietnam and Malaysia has been relatively stable and it went up to 9. the trend of FDI inflows in both absolute and relative terms in ASEAN economies does not reveal any clear discernible pattern involving GDP and FDI.and Extra-ASEAN regions provided the influx of FDI to ASEAN nations.e. Once we identify a single cointegration vector among the selected variables. it requires that all variables in the system are integrated of the same order I(1). the percentage of FDI to GDP ratio remained to be volatile. respectively.and Extra-ASEAN sources by making ASEAN as a region of competitiveness and attractiveness for investment and business operations. Indonesia saw a negative percentage of FDI to GDP ratio. Before implementing the cointegration and VECM. the AIA aims to enhance FDI inflow from Intra. If the selected data series are found to be integrated in an identical order. However. ASEAN has closely continued the implementation of the framework agreement on the AIA. these three nations have not shown any progress in FDI as percentage GDP during 1995. largely due to economic down turn in the US and Europe.

2. then there is a feedback relationship between FDI and GDP. if some of the 2i coefficients. Estimating the following equations.n-1 are not zero and the error coefficient r2 in the equation of GDP is significant at convention levels. The null hypothesis is accepted or rejected based on the standard Wald F-test to determine the joint significance of the restrictions under the null hypothesis.2.. in the Granger sense. FDIt and GDPt are FDI and GDP of individual ASEAN economies at time `t'. According to Granger representation theorem. If FDI and GDP do not cause each other. Hence. One variable GDP is said to Granger cause another variable.3. The superiority of the explanation is then investigated if additional lagged values of GDP improve the explanation of FDI. from the above Equations (3) and (4). . if GDP can be explained by using past values of FDI. if FDI and GDP are not cointegrated. if variables are cointegrated then their relationships can be expressed as VECM. They are (1) to identify the direction of causality between FDI and GDP and (2) to measure the speed with which deviations from the long run relationship are corrected by changes in the FDI and GDP. the VECM can be written as: where D is the first difference operator and efdit and egdpit are white noise disturbance terms.. the standard Granger (1969) bivariate causality is performed without including error correction term. If both FDIt and GDPt Granger cause each other. FDI. Similarly. and ECTt-k is the lagged error correction term. i = 1. FDIt Granger causes GDPt. Engle and Granger (1987) show that cointegration is implied by the existence of a corresponding error correction representation which implies that changes in the dependent variable are a function of the level of the disequilibrium in the cointegrating relationships (captured by error correction term) and changes in other independent variables.the short run and long run dynamics for the variables involved in the model. There is bidirectional causality if both significant. causality can be found by testing the null hypothesis H0: 2i = 2i = 0. These hypotheses can be tested by using either t-tests or F-tests on the joint significance of the lagged estimated coefficients. On the other hand. In terms of the VECM of Equations (1) and (2).. i = 1. performance of the standard Granger causality is tested: Testing causal directions among the variables of interest. respectively. GDP Granger causes FDI if 2i 2i and 2i are is statistically significant but 2i is not.. and FDI Granger causes GDP if 2i is statistically significant but 2i is not.n-1 are not equal to zero and the error coefficient r1 in the equation of FDI flows is significant at convention levels. r1 and r2 serve two purposes. it is clear that GDP Granger causes FDI if 2i >0 and FDI Granger causes GDP if 2i >0. This is called unidirectional causality. GDPt Granger causes FDIt. Provided that variables in our case are cointegrated.3. if some of the 2i coefficients. The error correction coefficients.

Indonesia. 1995). the annual time-series data on net FDI inflows and GDP for Brunei Darussalam. The plot of the IRF shows the effect of a one standard deviation shock to one of the innovations on current and future values of the endogenous variables. The Philippines. fdit or gdpit on the time paths of the GDPt or FDIt The data used for the study consist of net FDI inflows and GDP from the ASEAN economies which include Brunei Darussalam. . FDI and GDP of the individual ASEAN economies for the Impulse Response Function technique. Hence. Singapore. Lao People's Democratic Republic. Philippines. both the series are found to be stationary and integrated at the order of one I(1). Singapore and Thailand were considered for the period 1970-2007. For Lao People's Democratic Republic. The real GDP series were obtained from International Monetary Fund's International Financial Statistics (IFS) database. Myanmar. Malaysia. Myanmar and Vietnam. The standard Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests were employed to examine stationary property of the selected data series. The inward FDI series were compiled from United Nations Commission for Trade and Development (UNCTAD) reports. The values of both series are expressed in terms of millions of US dollars in current prices. Thailand and Vietnam. Malaysia. This study includes two variables. it was carried out from 1980-2007 because of lack of availability of data on FDI inflows prior to 1980. The data on FDI inflows are limited and time series of most countries start in the late 1960s and early 1970s. the Impulse Response Function (IRF) has been employed to investigate the time paths of Log of Foreign Direct Investment (LFDI) in response to one-unit shock to the Log of Gross Domestic Product (LGDP) and vice versa.all the coefficients of GDP in Equation (3) and of FDI in Equation (4) should be statistically insignificant. Finally. Empirical Results and Discussions The unit root property of the data series is crucial for the cointegration and causality analyses. which prevent the consideration of longer time span for the analysis. But. Table 3 depicts the results of ADF and PP tests for the GDP and FDI series of the ASEAN economies. Both the unit root test results reveal that the null hypothesis of unit root for the selected variables such as FDI and GDP in case of each individual country was not rejected at levels. when the series are first differentiated. The impulse response function analysis is a practical way to visualize the behavior of a time series in response to various shocks in the system (Walter Enders. Indonesia. Plotting the impulse response function can trace the effects of shocks to sequences.


the Granger Representation Theorem (Engle and Granger. Malaysia. the VECM is sensitive to the selection of optimal lag length and the necessary lag length of FDI and GDP series is determined by the Schwarz . By using the definition of cointegration. so there are no stable long run relationship between the two variables in case of four ASEAN economies. In the table. which states that if some variables are cointegrated. 1987). Besides. Philippines. implying that FDI and GDP are not cointegrated. Singapore and Vietnam indicate that the null hypothesis of no cointegrating vector (r = 0) can be rejected at 5% significance level. Myanmar and Thailand. While in Democratic Republic. the results support the hypothesis of cointegration between FDI and GDP.Proven that both the series are integrated of same order I(1). For the purpose. implying that there are stable long run relationships between the two variables in case of five ASEAN countries. and the alternative hypothesis of at the most one cointegrating vector (r ³ 1) can be accepted. then there exist valid error correction representations of the data. we should search for proper VECM to determine the direction of long run causation. After confirming the existence of single cointegrating vector among FDI and GDP for five ASEAN economies namely. Indonesia. Indonesia. the results of Johansen's maximum eigen and trace statistics fail to reject the null hypothesis of no cointegrating vector (r = 0). the VECM is estimated and it is presented in Table 5. the Johansen cointegration test was performed to examine the presence of long run relationship between FDI and GDP for the individual ASEAN economies and its results is presented in Table 4. Philippines. Singapore and Vietnam. the Johansen's maximum eigen and trace statistics for five ASEAN economies namely. Therefore. Malaysia.

the results of the Granger Causality test for Myanmar show that the hypothesis that GDP does not Granger Cause FDI cannot be rejected but the hypothesis that FDI does not Granger Cause GDP can be rejected. The results for Brunei Darussalam and Lao People's Democratic Republic show that the null hypothesis of `FDI does not Granger Cause GDP' and `GDP does not Granger Cause FDI' cannot be rejected. the lagged coefficients of FDI are statistically significant at 5% levels. Finally. This indicates the presence of long run causality between FDI and GDP that runs in both directions for Malaysia. The results of the Granger causality test for these countries have been reported in Table 6. In Table 5. `GDP does not Granger Cause FDI'. signifying that direction of causality also runs from GDP to FDI. is rejected. implying that the direction of causality runs from FDI to GDP. (-0. the coefficient of GDPt-1 is statistically significant at 5% level. Besides. we applied for the standard Granger causality test (Equations 3 and 4) to determine short run causal relation between the variables. the Granger Causality test results for Thailand indicate that the null-hypothesis. Also. This suggests the validity of long run equilibrium relationship among the variables. the impulse response functions were applied to reveal the dynamic causal relationships between FDI and economic growth. implying that there exists unidirectional long run causality runs from GDP to FDI. in GDP equation is found to have expected negative sign and significant at 1% level. Singapore and Vietnam. the VECM results for Philippines and Singapore confirm the presence of long run equilibrium relationship between FDI and GDP and one-way causality runs from GDP to FDI.Information Criterion (SIC) and it reveals optimal lag of one and two for Indonesia and Philippines and Malaysia. `FDI does not Granger Cause GDP'. the lagged coefficients of GDP in FDI equation are statistically significant at 1 and 5% levels. respectively. ECTt-1. the VECM results for Vietnam exhibit long run relation between FDI and GDP and bidirectional causal linkage exists between FDI and GDP. one-way Granger causation runs from FDI to GDP in the short run. namely Brunei Darussalam. For Malaysia. since FDI and GDP are not cointegrated by the Johansen cointegration test.432) in FDI equation is negative and statistically significant at 1% level. Myanmar and Thailand. Therefore. ECT t-1. Similarly. Lao People's Democratic Republic. the VECM results for Indonesia show that the error correction coefficient. Besides. Besides. Therefore. cannot be rejected but the hypothesis. It also implies that 43% of disequilibrium from the pervious period's shock converges back to the long run equilibrium in the current period. In Appendix 1. Similarly. TABLE 5 For the rest of the ASEAN economies. implying that the relationship between FDI and GDP is independent of one another. one-way short run causality runs from GDP to FDI and not the other way. Figures 1 to 9 show the . Further. the results of VECM show that error correction coefficient.

The Johansen Cointegration results establish a long run relationship between FDI and GDP for the five ASEAN countries. Besides. Philippines. but only for the two years and then it declines and becomes zero in the sixth year and dies out thereafter. Figure 4 shows that FDI shock has a positive effect on GDP for the longer time-period. the results reveal long run bidirectional causal link between GDP and FDI. For Indonesia. Besides. the response of FDI to GDP shock begins with negative and becomes zero in two years. These illustrate the response of GDP to the innovation in FDI and by GDP itself and also show the response of FDI to the innovation in GDP and by FDI itself. Figure 3 indicates the negative response of GDP from a FDI shock. This implies that the impact of GDP on FDI and vice versa is found to be positive in case of Malaysia. Besides. Moreover.impulse response functions for each country. In the case of Lao People's Democratic Republic. Besides. But the shock in GDP has negative effect on FDI inflows. in case of Vietnam. Singapore and Thailand. Figures 6 to 8 show that FDI shock has a positive effect on GDP. the figures reveal that the positive GDP shock has an immediate positive impact on FDI. Figure 2 shows that FDI shock has created positive impact on GDP and it declines and dies out after the eighth period. Malaysia. The present study suggests that the enhancement of country's economic growth performance was much needed to attract FDI flows rather than liberalized FDI-oriented policy efforts in the case of Indonesia. Besides. the Philippines. they should adopt effective policy measures that would substantially enlarge and diversify their economic base. This indicates that there is no impact of FDI on GDP or vice versa. For Myanmar and Thailand. Singapore and Thailand. the study implies that Myanmar's capacity to progress on economic development depends on country's performance in attracting FDI flows. improve local skills and build up a stock of human capital resources . Singapore and Vietnam. In addition. respectively. the study suggests that the governments of Brunei Darussalam and Lao People's Democratic Republic should formulate adequate liberalized policy frameworks to attract stable foreign investment inflows. the test results show that there is a one-way short run Granger causal link from FDI to GDP and GDP to FDI. positive GDP shock has an immediate positive impact on FDI. the economic growth performance is the driving force behind the surge in FDI inflows in addition to being a consequence of these inflows. Figure 1 presents the impulse response function for the Brunei Darussalam. But the positive GDP shock has immediate positive impact on FDI for the longer time period. Besides. Finally. For Malaysia and Vietnam. Indonesia. Conclusion Johansen Cointegration technique followed by VECM and standard Granger Causality test were employed to investigate the causal nexus between FDI and economic growth in ASEAN economies. This result is consistent with the earlier finding of standard Granger Causality test. Similarly. It reveals that positive impact of GDP from a FDI shock is minimal for three years and then starts declining and becomes zero in five years. The empirical results of VECM exhibit a long run causality running from GDP to FDI for Indonesia. Figure 9 shows that FDI shock has created positive impact on GDP. the evidence from standard Granger Causality test for rest of the ASEAN countries shows that there was no causality between FDI and GDP for Brunei Darussalam and Lao People's Democratic Republic. For Myanmar. implying that FDI shock has greater impact on GDP. the Philippines and Singapore. In the case of the Philippines. These findings from impulse response functions for each ASEAN economies are consistent with the results of VECM and the Granger causality test. the response of FDI to GDP shock begins with negative but has greater positive effect on FDI inflows for the longer time period. Hence. Figure 5 shows that the response of GDP to a shock in FDI is found to be more significant compared with other sample countries. the GDP shock has a positive response of FDI. For Malaysia and Vietnam. these two countries pursue the ongoing economic policies with regard to growth and FDI more vigorously. namely.

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