29 th May 2014. Vol.25 No.1 CO-INTEGRATION AND CASUALTY BETWEEN FDI AND GDP: A STUDY OF BRICS NATIONS Dr. Nishi Sharma 1, Mr. Nishant 2 1 Assistant Professor, n Institute of Public Administration, Delhi, 2 UIAMS, Panjab University, Chandigarh, 1 jmdnishi@yahoo.com Abstract The present paper attempts to examine the association between inflow of foreign direct investment and gross domestic product of BRICS countries viz.,,,, and South Africa. The study covered a period of 20 years from 1993 to 2012. The data (except FDI inflow in South Africa) found to have unit root at original level but become stationary at different orders. The results of co-integration rank test established significant association among FDI and GDP in and South Africa. The results indicated that there is no long term relation between FDI and GDP in. The results for and indicated the acceptance of null hypothesis of presence of at most one co integrated equation. Granger casualty test confirmed the results of co-integration and found that in neither GDP Granger cause FDI nor FDI Granger cause GDP. However for rest four nations unidirectional relationship was observed. In and GDP granger caused FDI whereas in and South Africa FDI Granger cause GDP. Key Words:,, FDI, GDP,,, South Africa INTRODUCTION Globalisation led to major changes and bought numerous benefits to the host economy. One of the greatest boons to economy is inflow of foreign direct investment (FDI). FDI is usually defined as the net inflows of overseas investment (inflow minus outflow) in host country. It may be in three forms viz., horizontal FDI i.e. duplicating home based activities in host country; vertical FDI i.e. moving upstream or downstream in different value chains through remittance of capital and platform FDI where destination country is used for establishing trade relations with third country. Every form of FDI injects foreign exchange and such influx of capital lead to more productivity and increased revenue of host economy. FDI enhances tax revenues and boost development process through providing gateways for infrastructural development and technological advancement. It leads to generation of employment opportunity and access to research and development resources. The trend of FDI inflow in BRICS nations (,,, and South Africa) may be observed through figure [1]. 300,000 250,000 200,000 150,000 100,000 50,000 0-50,000 Figure1: FDI inflow in BRICS nations BF RF IF CF SF 94 96 98 00 02 04 06 08 10 12 71
29 th May 2013. Vol.25 No.1 As shown in the graph FDI inflow and GDP found to be highest for and lowest for South Africa. During recent global crisis all five economies suffered with oscillations in FDI inflow and also experienced fluctuations in their GDP [figure 2]. 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 Figure2: GDP of BRICS nations BG RG IG CG SG 94 96 98 00 02 04 06 08 10 12 Whether FDI has any influence over GDP or not..and if yes, is it positive or negative? It is a question that has been raised many decades back but still looking for justifiable answer. In fact, the impact of foreign direct investment (FDI) over economic growth has always been a highly controversial issue. The proponents of FDI [1] [2] [3] argue that FDI is a strong catalyst for economic growth. It injects better technology, capital, employment opportunity and foreign exchange. However, another group criticise any impact of FDI over growth or GDP of the economy. The opponents argue that FDI inflow crowds out domestic investment and make an adverse effect on growth in the long run, if not in the short run. It is harmful for domestic producers and thus resulted into downfall of GDP. Further excessive reliance over FDI may create political pressure and economy also become more prone to international exposures / risks. During last few decades many studies have been conducted to investigate association (if any) between FDI and GDP. But the study of BRICS nation (,,, and South Africa) is really in scarcity. In this reference the present paper attempts to examine whether any relationship exists between FDI and GDP of BRICS countries or not. The study covers a period of 20 years from 1993 to 2012. The next paragraphs review the available literature, clarify the research methodology and discuss empirical results of the present study. REVIEW OF RELATED LITERATURE Influence of macro-economic variables particularly FDI has been a lucrative arena for researchers. Particularly after recent global crisis, impact of different variables over growth of the economy has become need of hour. Some of the recent studies include investigation of linkage among GDP, FDI and inflation in Pakistan [4]. The study covered a period from 1981-2010 and applied multiple regression model to examine the relationship. The results reported that GDP and FDI have positive association whereas GDP and Inflation depicted negative relationship. The impact of FDI on economic growth of the seven SAARC countries viz., Pakistan,, Bangladesh, Sri Lanka, Maldives, Bhutan and Nepal has also been examined [5]. The study covered a period from 2001 to 2010. GDP of the nations was regressed through multiple regression model and FDI & consumer price index have been taken as independent variables. There results revealed that there is a positive and significant relationship between GDP and FDI. But in case of Maldives inverse impact of FDI on its GDP has been observed owing to the negative FDI Figure in some years. Further no significant relationship could be established between GDP and inflation. Relationship of FDI with Nigerian macro economic variables: inflation rate (measured by consumer price index), FDI, GDP, interest rate, crude oil production and energy consumption has been investigated [6]. The study analyzed the data of six from 1970 to 2004 through augmented dickey fuller test, co-integration test vector autoregressive model, vector error correction model and Granger causality test. The result indicated co-integration of first order. The study also revealed that at 5% significance level, FDI has positive impact on GDP in Nigeria and there is a long term relationship between FDI and GDP. The possibility of co-integration between GDP and FDI inflow has been examined in Georgia [7]. The study analyzed the data from 1997-2010. 72
29 th May 2014. Vol.25 No.1 Augmented Dickey-Fuller test results indicated that hypothesis of unit root in FDI and GDP cannot be rejected at original level. However, the hypothesis could be rejected at difference level. The results of co-integration indicated long run equilibrium between GDP and FDI. Causality test established unidirectional causality from FDI to GDP. The relationship between FDI and GDP in Pakistan has been investigated over a period of 1971-2007 [8]. The study considered GDP as dependent variable and has taken FDI, labour force and domestic capital as independent variables. The result of co integration and error correlation model suggested that there is a positive relationship between FDI and GDP in short run as well as long run. It also evidenced that increase in FDI lead to GDP growth. In another study [9] of relationship between FDI and GDP in Pakistan for a period from 1980-2010 the results of augmented dickey fuller test confirmed the presence of unit root at levels. However FDI and GDP found to be first difference stationary. The result of co-integration analysis established long run relationship between FDI and GDP at not only 5% but also at 1% level of significance. The study over a period from 1980-2010 analyzed annual data of foreign direct investment, gross domestic product and gross national income (GNI) of Ghana [10]. The study applied Johansen s multivariate co-integration test along with granger causality test. Co integration tests evidenced presence of one unique co integrating vector i.e. long-run relationship among FDI and selected economic growth indicators for the period of study. Granger Causality test exhibited unidirectional causal relationships from GDP to FDI and from GNI to GDP. However, no reverse causality has been observed. The relationship between FDI and economic growth has been assessed for Rwanda economy [11]. The study analyzed stationarity, lag structure, co-integration and causality between FDI and GDP during 1970-2010. The result exhibited GDP and FDI found to be integrated of order one as data was stationary at first differences but not at levels. Co integration analysis also indicated long-run equilibrium relationship between the two series. The results of vector error correction model exhibited that change in GDP affect FDI but GDP does not respond to change in FDI. Granger tests suggested that two variables are independent i.e., there is no causality between GDP and FDI for the Rwandan economy. Recently a study [12] analyzing data over a period of 30 year from 1983 to 2012 examined the relationship between FDI and GDP through regression model. The data comprised of gross capital formation, labor, health expenditure, FDI and openness to trade in export oriented. The results indicated positive relationship between FDI and GDP in Pakistan. Further the study revealed that the impact of FDI on GDP in the Exports oriented economy is more than any imports substitution economy. The study described that economic growth capacity depends upon ability to get FDI inflow. Further the degree of FDI impact on GDP depends upon country s export promotion policy. Above outline clearly demonstrate availability of huge work conducted to investigate the direction of study of relationship between FDI and GDP. However, it is worthwhile to notice that most of the studies are limited to few specific countries and study of BRIC nations has not been dissected much by researchers. In this context, the present paper attempts to investigate the relationship between FDI and GDP. RESEARCH METHODOLOGY Data The present paper attempts to investigate cointegration and casualty between FDI inflow and GDP of five BRICS nations viz.,,,, and South Africa. The study covers a period of 20 years from 1993 to 2012. The data has been taken from OECD Statistics and IMF IMF statistics. Data Analysis At the outset the normality of data and correlation among variables has been checked. Thereafter Phillips-Perrron unit root test has been conducted to test the following null hypothesis: : There is unit root in the series. In other words, the data is not stationary in nature. Alternate Hypothesis: There is no unit root in the series i.e. data is stationary in nature. The data is suitable for further analysis only when it is stationary in nature. However lack of unit root is not very common in the results. In the present study also out of ten variables (FDI and GDP of all 73
29 th May 2013. Vol.25 No.1 five nations) only one variable found to be stationary. To remove the problem of unit root the variables have been converted at different difference order ranging from one to three. After confirming absence of unit root, Johansen s unrestricted co-integration rank test has been administered to check the possibility of any long-term relationship between FDI and GDP. The test is based on two statistics viz., trace test statistics and maximum Eigen value test statistics. Null hypotheses for both of the tests are as follows: (Trace test): Number of distinct co integrating vector(s) is less than or equal to number of co integration relations. (Maximum Eigen value): There is exactly r number of co integrating relations against the alternative of r + 1 co integrating relations. The paper further employed Granger casualty test to investigate the direction of relationship between the studied variables. The test is helpful in ascertaining whether one time series is useful in forecasting another or not. The present paper applied Granger test to confirm following hypotheses: 1: FDI does not Granger Cause GDP Alternate Hypothesis 1: FDI Granger Cause GDP 2: GDP does not Granger Cause FDI Alternate Hypothesis 2: GDP Granger Cause FDI The hypothesis will be accepted only when the probability of F statistics is more than 5% and will be rejected if the same found to be less than 5%. FINDING AND ANALYSIS FDI inflow in all economies (except South Africa) found to be positive during study period. Table [1] represents the descriptive statistics of FDI and GDP of selected nations. FDI inflow found to be highest for followed by respectively,, and South Africa. GDP was found to be highest for followed by,, and South Africa. However, it is worthwhile to mention among all BRICS countries, demonstrated highest volatility in respect of FDI as well as GDP. The result of Jarque Berra test represents that most of the studied variables do not follow normal distribution. However absence of normality of distribution does not seriously threaten the suitability of data for further analysis. Therefore we proceed to check the correlation among different variables [table 2]. Table 1: Descriptive statistics Particulars FDI GDP (BF) (RF) (IF) (CF) SA (SF) (BG) (RG) (IG) (CG) SA (SG) Mean* 25.75 17.92 12.98 98.59 2.87 1064.89 767.50 819.92 2639.24 211.39 Max.* 66.66 75.86 43.41 280.00 9.01 2474.64 2029.81 1872.85 8221.02 401.80 Min.* 1.29 0.69 0.53 27.52-0.53 438.30 172.77 283.23 559.22 111.10 SD* 18.79 20.94 14.00 81.82 2.85 633.60 616.69 525.75 2333.93 94.83 Skew. 0.83 1.33 0.93 1.09 0.67 1.06 0.85 0.86 1.19 0.74 Kurtosis 2.96 4.02 2.36 2.82 2.07 2.79 2.24 2.34 3.16 2.22 JB stat 2.32 6.73 3.23 4.01 2.23 3.79 2.87 2.84 4.73 2.35 Prob. 0.31 0.03 0.20 0.13 0.33 0.15 0.24 0.24 0.09 0.31 *Figures are in 000. 74
29 th May 2014. Vol.25 No.1 Table 2: Correlation Matrix Variable BF CF IF RF SF BG CG IG RG SG BF 1.00 0.87 0.73 0.61 0.49 0.87 0.87 0.86 0.83 0.78 CF 0.87 1.00 0.85 0.74 0.48 0.97 0.97 0.98 0.97 0.97 IF 0.73 0.85 1.00 0.90 0.63 0.86 0.85 0.89 0.91 0.84 RF 0.61 0.74 0.90 1.00 0.59 0.70 0.68 0.75 0.83 0.74 SF 0.49 0.48 0.63 0.59 1.00 0.48 0.49 0.52 0.56 0.45 BG 0.87 0.97 0.86 0.70 0.48 1.00 0.96 0.96 0.95 0.94 CG 0.87 0.97 0.85 0.68 0.49 0.96 1.00 0.99 0.97 0.95 IG 0.86 0.98 0.89 0.75 0.52 0.96 0.99 1.00 0.98 0.98 RG 0.83 0.97 0.91 0.83 0.56 0.95 0.97 0.98 1.00 0.96 SG 0.78 0.97 0.84 0.74 0.45 0.94 0.95 0.98 0.96 1.00 Correlation matrix reveals positive correlation among different variables and very high degree of correlation has been observed among some variables. Further in each case the probability found to be less than 1%. The results proved to be encouraging enough to precede further analysis of co-integration among FDI and GDP of selected countries. But relationship between two variables may be examined only when they do not have any unit root. Table [3] represents the results of Phillips-Perron unit root test. Table 3: Result of unit root test Variables Original level Difference level With Constant With Constant and Linear Trend With Constant With Constant and Linear Trend t stat. Prob. t stat. Prob. t stat. Prob. t stat. Prob. BF -0.43 0.88-1.71 0.71-4.31 0.00-4.28 0.02 BG 0.41 0.98-0.86 0.94-6.02 0.00-5.13 0.00 RF -1.52 0.50-2.32 0.40-4.69 0.00-4.52 0.01 RG 1.37 1.00-0.88 0.94-4.09 0.01-8.60 0.00 IF -1.06 0.71-2.01 0.56-4.23 0.00-4.02 0.03 IG 2.19 1.00-0.59 0.97-5.58 0.00-6.82 0.00 CF 1.25 1.00-1.49 0.80-4.50 0.00-8.24 0.00 CG 9.38 1.00 3.96 1.00-6.01 0.00-7.44 0.00 SF -3.90 0.01-11.52 0.00 - - - - SG 0.56 0.98-1.32 0.85-4.76 0.00-4.67 0.01 The results of unit root test provide sufficient evidence to accept null hypothesis for all variables except for SF i.e. FDI inflow in South Africa. The test was conducted on the basis of intercept level as well as trend & intercept level. But same results have been observed. As to establish any possible association between two variables both variables should be stationary, therefore the variables have been converted at difference level. FDI inflow of,, and found to be stationary 75
29 th May 2013. Vol.25 No.1 at first difference order. GDP of n economy demonstrated lack of unit root at first difference order. GDP of, and South Africa become stationary at second difference order. However, n GDP could become stationary at third difference order. The data so converted has further been utilized for establishing any possible relationship. At the outset unrestricted co-integration test was conducted [table 4]. Table 4: Results of co-integration rank test Country No. of Co Trace Test Max Eigen value test integrated Eigen Statistic Critical Prob. Eigen Statistic Critical Prob. equations value Value value Value None 0.81 30.99 15.49 0.00 0.81 26.60 14.26 0.00 At most 1 0.24 4.40 3.84 0.04 0.24 4.40 3.84 0.04 None 0.48 12.18 15.49 0.15 0.48 11.15 14.26 0.15 At most 1 0.06 1.03 3.84 0.31 0.06 1.03 3.84 0.31 None 0.82 26.61 15.49 0.00 0.82 25.93 14.26 0.00 At most 1 0.04 0.68 3.84 0.41 0.04 0.68 3.84 0.41 None 0.71 22.36 15.49 0.00 0.71 19.79 14.26 0.01 At most 1 0.15 2.57 3.84 0.11 0.15 2.57 3.84 0.11 None 0.80 30.43 15.49 0.00 0.80 25.75 14.26 0.00 South Africa At most 1 0.25 4.67 3.84 0.03 0.25 4.67 3.84 0.03 The results of trace test indicated that for and South Africa the null hypothesis of absence of cointegration has been rejected and we may expect significant association among FDI and GDP in these economies. In case of the probability was found to be more than 5% and therefore, we accept the null hypothesis and may interpret that there is no long term relation between two variables in. The results for and indicate the acceptance of null hypothesis of presence of at most one co integrated equation. The direction of possible relationship has been diagnosed through Granger casualty test [table 5]. Table 5: Results of Granger Casualty test Particulars F-Statistic Probability Accepted Hypothesis FDI does not Granger Cause GDP South Africa 8.83497 1.07444 0.17385 1.32069 4.90025 0.0052 0.3722 0.8429 0.3062 0.0301 Alternate Hypothesis Alternate Hypothesis 76
29 th May 2013. Vol.13 No.1 2012 JITBM & ARF. All rights reserved GDP does not Granger Cause FDI South Africa 0.77878 0.15643 5.33444 5.89092 0.98804 0.4827 0.8569 0.0265 0.0182 0.4031 Alternate Hypothesis Alternate Hypothesis Granger casualty test attempts to verify possibility of bi-directional relationship between two variables i.e., whether one variable Granger cause another variable or not. In the present study the test was conducted to verify following two hypotheses: 1: FDI does not Granger Cause GDP Alternate Hypothesis 1: FDI Granger Cause GDP 2: GDP does not Granger Cause FDI Alternate Hypothesis 2: GDP Granger Cause FDI The results of F statistics indicated that out of ten hypotheses six hypotheses are acceptable at 5% level of significance. However four hypotheses have been rejected. Table 5 reveals that for three BRICS nations viz.,, and South Africa GDP does not Granger cause FDI. However, n and Chinese GDP found to be strong catalyst to promote FDI. The results established that in these economies GDP Granger cause FDI inflow. n, n, Chinese economies found to reject the possibility of causing GDP growth due to FDI inflow. However, FDI found to Granger cause GDP for and South Africa. CONCLUSION The present study analyzed the co-integration and casualty between GDP and FDI of BRIC nations. The study covered a period of 20 years from 1993 to 2012. FDI inflow found to be highest for followed by respectively,, and South Africa. GDP was found to be highest for followed by,, and South Africa. The economies found to be correlated with each other. The test of normality exposed absence of normality of distribution. Further, the data (except FDI inflow in South Africa) found to be suffered with the problem of unit root. However, at difference level they become stationary. Co-integration rank test established significant association among FDI and GDP in and South Africa. The results indicated that there is no long term relation between FDI and GDP in. The results for and indicated the acceptance of null hypothesis of presence of at most one co integrated equation. Granger casualty test confirmed the results of co-integration and found that in neither GDP Granger cause FDI nor FDI Granger cause GDP. However for rest four nations unidirectional relationship was observed. In and GDP granger caused FDI whereas in and South Africa FDI Granger cause GDP. The results are expected to be fruitful for making policies regarding FDI inflow in the economy. and South Africa must try to boost the influx of FDI in their economy so as to ensure GDP growth. Further, results also justify more FDI inflow in emerging economies i.e. and. Growing GDP in these economies attract foreign investors to invest in these economies. References [5]. Abbas, Q. Akbar, S. Nasir, A. S. Ullah, H. A., and Naseem, M. A. (2011), Impact of foreign direct investment on gross domestic product, Global Journal of Management and Business Research, 11 (8), 34-40. [8]. Ahmad, N. Hayat, M. F. Luqman, M., and Ullah, S. (2012), The Causal Links between Foreign Direct Investment and Economic Growth in Pakistan. European Journal of Business and Economics, 6, 20-21. 77
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