Causality Relationship between Foreign Direct Investment and GDP for India

Transcription

1 Inl.J.Adv.Res.Comm&Mgm.Mar015;1(1): 16 Causaliy Relaionship Causaliy Relaionship beween Foreign Direc Invesmen and GDP for India Dr. Saish Kumar, Professor, Dewan Insiue of Managemen Sudies, Meeru Mr. Sachin Chauhan, Ass. Professor, Dewan Insiue of Managemen Sudies, Meeru Absrac Deep analysis on how foreign direc invesmen (FDI) ineracs wih he hos counry s GDP is very impor for he idenificaion of he sraegies ha will enable a developing counry like India o achieve is developmen objecives. Hence we coninue o analyze he causaliy relaionship beween FDI and GDP of India for abou 14 years saring from he year 000 o 014.In his sudy he co inegraion and granger causaliy es analysis is conduced. The co inegraion es reveals ha here is exisence of a long run associaion ship among he variables in quesions. While he granger causaliy resuls sugges ha here is a causaliy relaionship which is unidirecional running from FDI o GDP. Keywords: foreign direc invesmen (FDI), gross domesic produc growh (GDPGR), Co inegraion es and granger causaliy, India Inroducion The analysis of an economic growh of one counry is complex as is deerminan is he combinaion of many involved variables according o heir conribuion o he growh rae of Gross Domesic Produc (GDP). However, he sudy of he main variable can be very essenial, paricularly o he policy makers, o promoe furher growh from ha one variable. Among he many deerminans idenified o explain an economic growh, Foreign Direc Invesmen (FDI) has become one significan elemen in his rising rend of globalizaion and inegraion in his world economy alhough he quesion as o how, and o wha exen, FDI affecs economic growh is relaively confliced from one sudy o anoher. Moreover, in developing counries, FDI is ofen seen as an impor conribuion for economic growh, and some developmen economiss have long argued ha counries pursuing ouwardoriened developmen sraegies are more likely o achieve higher raes of economic growh han hose ha are inernally focused (Sehi and Sucharia 011). Foreign direc invesmen plays a vial role o make subsial conribuion o he economic growh by invesing in secors and bringing along wih oher indirec posiive impacs including ransfer of echnology, raining, 1 skills, employmen, o name jus a few, which all conribue o he long erm developmen of he recipien counries. In addiion, he ousanding increase in FDI inflows demands he analysis of heir relaionship because he posiive relaionship beween FDI inflows and economic growh canno be universally agreed and he cerainy wheher FDI cause economic growh can be varied, ye he criical imporance of FDI inflow o one economy canno be denied. Hence, his paper aims o idenify he relaionship beween FDI inflows and GDP of India over 000 o 014. This sudy is organized ino four pars. Par 1 covers inroducion of he sudy, par ha covers he lieraure review which is followed by par 3 ha Covers he Mehodology of he sudy, daa source and inerpreaion of he resuls par 4 covers Conclusion and policy recommendaions. Lieraure Review Generally, mos of he previous empirical sudies discovered ha causaliy linkage beween foreign direc invesmen (FDI), expor and GDP growh o be so mixed. Wih Some researchers indicaing he unidirecional response while ohers indicaing he bidirecional response and remaining group find no response a all among he hree variables in quesions. To see how hose linkage beween he variables

2 Dr. Saish Kumar e al, (015) in quesion is mixed observe he following sudies. The sudies by M. Drisaki, C. Drisaki and A. Adamopoulos (004) on he analysis of how FDI, expor and economic growh relae o each oher in Greece for he years beween of shows ha he here is exisence of a long run equilibrium relaionship among he variables analyzed using he co inegraion es while Granger causaliy resuls shows a causal relaionship exised on hose variables. Miankhel, Thangavelu and Kalirajan (009) did he causaliy es beween FDI, expor and GDP (economic growh) for Pakisan, India, Malaysia, Mexico, Thailand and chile. Their findings were differen for all he six naions.their findings specifically reveal ha economic growh aracs FDI in India in he long run ha while GDP influence expor in Pakisan. The sudy shows ha Thailand had a bidirecional relaionship beween FDI and GDP implying ha FDI leads o GDP and hence GDP aracs FDI. Dasgupa (007) examined he long run impac of expor, impors and FDI inflows on he ouflows of FDI in India. His empirical resuls suggesed he presence of Unidirecional causaliy running from he expor and impor o FDI ou flows. The resuls found no causaliy exised from FDI inflows o he ouflows. According o he sudy by Syed Imran Ali Meerza (01) on he invesigaion of he causal linkage beween rade FDI and economic growh of Bangladesh beween 1973 o 00.In his sudy he found ha in he co inegraion es here was a long run relaionship on he variables being analyzed while he also found ha economic growh influences boh FDI and expor and ha here was he exisence of a unidirecional causal relaion beween FDI and expor which runs from expor o FDI. An empirical sudy by Shimul and Siddiqua (009) found no exisence of he linkage of FDI and GDP for Bangladesh for a period beween Mohammad Sharif karimi (009) using he mehodology of Toda and Yamamoo examined he causal relaionship beween FDI and economic growh for a period beween 1970 o 005 and found no srong evidence of bidirecional causaliy beween he wo variables hence he suggesed ha FDI has an indirec effec on economic growh in Malaysia. An empirical invesigaion of he sudy by Chow P. (197) on he causal relaionships beween expor growh and indusrial developmen in eigh newly indusrializing counries found ou ha here is a srong bidirecional causaliy relaionships beween he expor growh and indusrial developmen which suppor he expor led growh sraegy in he sense ha wih he expor expansion here will be he naional income growh of he counry. Chakrabory and Basu (00) Invesigaed on he relaionship beween economic growh and foreign direc invesmen (FDI) in India by employing he co inegraion and error correcion model mehod and found ou ha here is unidirecional relaionship wih causaion running from GDP o FDI and no oherwise. In his sudy Ahukorala (003) on The Impac of FDI on Economic Growh in Sri Lanka showed ha FDI inflows did no exer an independen influence on economic growh and he direcion of causaion was from GDP growh o FDI raher han FDI o GDP growh. Many researchers have used he granger causaliy es o explore he linkage of he variables in quesion hence hese sudies employ he same mehodology for he case of he developing counry like India and observe direcions of how hese variables reac owards one anoher. I should also be noed ha mos of he sudies (some no covered in he lieraure review above) has been focused on he cross secional daa in heir research for causaliy which is conrary on his sudy in he sense ha i pus focus on one individual developing counry of India which gives i an advanages of avoiding he problem of counry s uniqueness behaviour ha would have happened in case oher counries were involved for case of a cross secion daa analysis. In a cross secion daa analysis usually all counries involved are assumed o be homogeneous in heir

3 Inl.J.Adv.Res.Comm&Mgm.Mar015;1(1): 16 Causaliy Relaionship economical sae. Anoher disadvanage is wih he sensiiviy in fixing up a model. However according o oher previous sudies a panel daa analysis can sill capure a counries individual uniqueness behaviour successfully in case more han one counry is involved alhough i has been poined ou here is a possibiliy ha i canno explain o he grea exen he influence of he variables which usually canno be he same in differen counries. Therefore for simpliciy only India as one counry will be analyzed in his sudy o deermine he causaion of he variables in quesion. The Mehodology of he Sudy, Daa Source and Inerpreaion of he Resuls\ In his sudy we employ he granger causaliy es for he esimaion of he causaliy relaion beween FDI & GDP of India. The funcional form is as shown below: The sudy uses he annual (secondary) ime series daa covering he period This period has been chosen because daa o be used in he foreign direc invesmen inflow is likely o be available. The daa is colleced from Handbook of Indian economy published by RBI, India. All resuls are performed by using E view 7.0. The daa are hen pu in logarihmic forms denoed by in each variable o avoid heero scedasiciy problem. The model involves he analysis of he relaionship beween GDP & FDI. Once i is observed ha he variables analyzed have he same rend and he firs differences are also saionery in ha case we can proceed wih he process of co inegraion. The preliminary sep will be o find he order of inegraion by using he uni roo ess. When i happens ha he variables have a uni roo hen o become saionary we will have o differeniae he daa on he firs difference. Then he following sage will be using he Johansen and Juselius s co inegraion es o find he number of co inegraion. If he co inegraion is found hen here is a need o es 3 for Granger causaliy. Figure 1 above shows he rend of he wo variables under invesigaion i.e. FDI & GDP of India from he year 000 o Augmened DickeyFuller (ADF) I is necessary o sar wih a uni roo es o check wheher a given series say X is saionary or no. The DickeyFuller and Augmened DickeyFuller uni roo ess are popular in he lieraure. The ess require esimaion of he following equaion: ΔX μ αx 1 k i 1 γ i ΔX i ε (1 ) Where k is he value which ensures e be a whie noise series, D is he difference operaor, a and gi are parameers. The above procedure is known as he ADF es. The DF es follows a special case of ADF es when summaion par of he equaion (1) is zero, ha is when k = 0. The es sais of DF and ADF are esed under he null hypohesis of nonsaionary agains he alernaive of saionary. The resuls of augmened DickeyFuller (ADF) uni roo ess for each variable in a model which is a mehod developed by Dickey and Fuller (1979) esing for he significance of he independen variables.the resuls are presened in Table 1 TABLE 1 : ADF UNIT ROOT TESTING ADF Tes Sais A Gdp ADF Tes Sais A Firs Difference

4 Dr. Saish Kumar e al, (015) & Tren d None & Tren d None Adf Tes Sais A FDI ,, , Adf Tes Sais ,, A Firs Difference, ,, Noe:,, indicaes, 5 % & 10 % level of significance respecively The augmened Dickey Fuller resuls in able 1 shows ha he wo variables which are FDI (Foreign Direc invesmen) and GDP (Gross Domesic Produc) were no saionary a level bu hey became saionary afer he firs differences wih cons, wih cons & rend & none. Johansen Co Inegraion Analysis Johansen (19) oulined a mehod which was laer expanded by Johansen and Juselius (1990), which allowed for he esing of more han one co inegraing vecor in he daa and for he calculaion of maximum likelihood of hese vecors. This procedure yields wo es sais of he number of saisically significan coinegraing vecors. One is l max, which compares he null hypohesis H0 (r) wih an alernaive H1(r+1) where r is he coinegraing vecor. The second es is he race es which examines he same null of H0(r) versus a general alernaive, H1 (p) where p is he number of variables. In his framework, i is desirable o obain a leas one coinegraing vecor, r = 1 o esablish he model. If one ges r =, hen one could in principle assume ha he sysem is sable in more han one dimension. Table. Johansen co inegraion ess Unresriced Coinegraion Rank Tes (Trace) Hypohesi zed Trace 0.05 No. of CE(s) None A mos 1 Eigenva lue Saisi c Criical Value Prob Trace es indicaes coinegraing eqn(s) a he 0.05 level denoes rejecion of he hypohesis a he 0.05 level MacKinnonHaugMichelis (1999) p values Unresriced Coinegraion Rank Tes (Maximum Eigenvalue)

5 Inl.J.Adv.Res.Comm&Mgm.Mar015;1(1): 16 Causaliy Relaionship Hypoh esized No. of CE(s) None A mos 1 Eigenv alue Max Eigen 0.05 Criical Saisic Value Prob Maxeigenvalue es indicaes coinegraing eqn(s) a he 0.05 level denoes rejecion of he hypohesis a he 0.05 level MacKinnonHaugMichelis (1999) p values Noe: Boh race & max eigen Tes indicaes co inegraing eq(s) a 0.05 level. In conducing his es number of number of lag deerminaion is very impor herefore by selecing he Akaike informaion crierion and Schwarz crierion an opimal number of lag is achieved & hence on performing he co inegraion es we ge co inegraion vecor from boh race sais and Eigen value sais a 5 percen level. Analysis of Granger Causaliy es Causaliy is a kind of saisical feedback concep which is widely used in he building of forecasing models. Hisorically, Granger (1969) and Sim (197) were he ones who formalized he applicaion of causaliy in econom. Granger causaliy es is a echnique for deermining wheher one ime series is significan in forecasing anoher The Granger causaliy es resuls shows ha he causal unidirecional relaionships exis only beween FDI and GDP wih he direcion running direc from FDI o GDP which imply ha FDI is can be used in forecasing GDP alhough in realiy i is hard o find his evidence This finding collaboraes wih he findings of M. Drisaki, C. Drisaki and A. Adamopoulos (004) and Samsu e al. (00). (Granger, 1969). The sandard Granger causaliy es (Granger, 19) seeks o deermine wheher pas values of a variable helps o predic changes in anoher variable. The definiion saes ha in he condiional disribuion, lagged values of Y add no informaion o explanaion of movemens of X beyond ha provided by lagged values of X iself (Green, 003). We should ake noe of he fac ha he Granger causaliy echnique measures he informaion given by one variable in explaining he laes value of anoher variable. In addiion, i also says ha variable Y is Granger caused by variable X if variable X assiss in predicing he value of variable Y. If his is he case, i means ha he lagged values of variable X are saisically significan in explaining variable Y. The null hypohesis (H0) ha we es in his case is ha he X variable does no Granger cause variable Y and variable Y does no Granger cause variable X. In summary, one variable (X) is said o granger cause anoher variable (Y) if he lagged values of X can predic Y and vice versa. Following is he resuls of he granger causaliy es as indicaed by able no.3 below Null Hypohesis Obs F Prob. Conclusion GDP does no Granger Cause FDI FDI does no Granger Cause GDP FDI GDP However, his resul conrad wih ha was found by sudy by Syed Imran Ali Meerza (01) for Bangladesh. All his sudy sill suppor he FDI leads o growh in GDP for india as evidenced by he resuls. Conclusion and Policy Recommendaions The sudy has been conduced using he annual daa spanning from 000 o 014 for he sake of idenifying he causaliy relaion beween FDI & GDP of India. We firs sared wih he 5

6 Dr. Saish Kumar e al, (015) es of saionariy of he hree variables in quesion using augmened DickeyFuller (ADF) es and he resuls showed ha he wo variables which are FDI (Foreign Direc invesmen) and GDP (Gross Domesic Produc) were no saionery a level bu hey became saionery afer he firs differences. The co inegraion es found one co inegraion equaion on boh he maxeigen and Trace sais implying he exisence of a long run associaion ship on he variables in quesion. While he granger causaliy es resuls showed ha here is unidirecional causaliy was found fr o m FDI o GDP, he resuls also implies ha eiher FDI can be used o predic GDP. The findings of his sudy may conribue o he exising lieraure especially for India and oher developing counries on he facors in quesions when i comes o policy making in he counry. The research is also limied basing on he fac ha he daa for India is no so exhaused herefore inerpreaion should be done wih care and furher sudies should focus on hose limiaion ha migh bring a more robus resuls for he case of India. References Akaike, H. (1973). Informaion heory and an exension of he maximum likelihood principle. In Perov, B., & Csaki, F. (Eds.), nd Inernaional Symposium on Informaion Theory. Budapes, Academia Kiado. Ahukorala. (003). The impac of foreign direc invesmen on economic growh in Sri Lanka. Sri Lankan Journal of Agriculural Econom, 6(1). Brooks (00). Inroducory economer for finance. Chow, P. (197). Causaliy beween expor and indusrial developmen. Journal of Developmen Econom,6, hp://dx.doi.org/ /030437(7) Dasgupa, N. (009). Examining he long run effecs of expor, impor and FDI inflows on he FDI ouflows from India: A causaliy analysis. Journal of Inernaional Business and Economy, 10(1), 65. Dickey, D. A., & Fuller, W. A. (1979). Disribuions of he esimaors for Auoregressive ime series wih uni roo. J. American Sa. Assoc., 74, Drisaki, M., Drisaki, C., & Adamopoulos, A. (004). A causal relaionship beween rade, foreign direc invesmen and economic growh of Greece. American Journal of Applied Sciences, 1, hp://dx.doi.org/10.344/ajassp Granger, C. W. (19). Some recen developmens in a concep of causaliy. J. Economer, 39, hp://dx.doi.org/ / () Granger, C. W. J. (1969). Invesigaing causal relaions by economeric models and cross specral mehod Economerica, 37(3), hp://dx.doi.org/10.307/17 Gujarai, D. (1995). Basic economer (3rd ed.). Singapore: McGrawHill. Harris, R. (1995). Using co inegraion analysis in economeric modeling. London: Prenice Hall. Johansen, S., & Juselius, K. (1990). Maximum likelihood esimaion and inference on co inegraion wih applicaions o he demand for he money. Oxford Bullein of Econom and Sais, 5, hp://dx.doi.org/ /j mp x Meerza, S. I. A. (01). The causal links beween rade, foreign direc invesmen and. economic growh for Bangladesh. Working paper. Miankhel, A. K., Thangavelu, S. M., & Kalirajan, K. (009). Foreign direc invesmen, expor and economic growh in Souh Asia and seleced emerging counries: A mulivariae VAR analysis. Working paper 3, Cenre for Conemporary Asian Sudies, Doshisha Universiy. Mohammad, S. (009). FDI and economic growh in Malaysia. Universiy of pura Malaysia. Shimul, S. N., Abdullah, S. M., & Siddiqua, S. (009). An examinaion of FDI and growh nexus in Bangladesh: Engle and granger and bound esing co inegraion approach. BRAC Universiy Journal, 1(1), hp:// spx?head=handbook%0of%0sais%0on% 0Indian%0Economy accesses on 7 December,014.