A number of empirical studies have been undertaken to establish robust results in regard to the impact of foreign direct investment on economie growth. The results of the studies show varied evidence with sorne indicating that FDI has positive impact while others show a negative impact ofFDI on growth.
According to the study done by Agrawal (2000) on economie impact of foreign direct investment in south Asia by undertaking time-series, cross-section analysis of panel data from five South Asian countries; India, Pakistan, Bangladesh, Sri Lanka and Nepal, that there exist complementarily and linkage effects between foreign and national investment. Further he argues that, the impact ofFDI inflows on GDP growth rate is negative prior to 1980, mildly positive for early eighties and strongly positive over the late eighties and early nineties. Most South Asian countries followed the import substitution policies and had high import tariffs in the 1960s and 1970s. These policies gradually changed over the 1980s, and by the early 1990s, most countries had largely abandoned the import substitution strategy in favour of more open international trade and generally, market oriented policies. The results of the analysis carried out by Kohpaiboon (2004) on the impact of FDI on growth performance in investment receiving countries through a
case study of Thailand for the period 1970-1999, shows that the growth impact of FDI tends to be greater under an export promotion trade regime compared to an import substitution regime.
Four studies, relying on a variety of cross-country regressions, have looked into necessary conditions for identifying a positive impact ofFDI on economie growth. Interestingly, they stress different, though closely related, aspects of development. First, Blomstrom et al. (1994) argue that FDI has a positive growth-effect when a country is sufficiently rich in terms of per capita income. Second, Balasubramanyam et al. (1996) emphasize trade openness as being crucial for acquiring the potential growth impact of FDI. Third, Borensztein et al. (1998) find that FDI raises growth, but only in countries where the labour force has achieved a certain level of education. Finally, Alfaro et al. (2004) draw attention to financial markets as they find that FDI promotes economie growth in economies with sufficiently developed financial markets.
A panel study including 23 countries was carried out for the period from 1978 to 1996 by Basu et. al. (2003) to identify long run and short run effects of FDI. Accordingly, an analysis of the cointegration estimates suggests that there was a long run cointegrated relationship between FDI and GDP for the entire panel of 23 countries. Furthermore, for open economies, causality between FDI and GDP appears to be bi-directional. But causality is bi-directional only in the short run for relatively closed economies. Long run causality for relatively closed economies is uni-directional and runs mainly from GDP to FDI.
Zhang (200 1) looks at 11 co un tries on a country-by-country basis, dividing the co un tries according to the time series properties of the data. Tests for long run causality based on an error correction model, indicate a strong Granger-causal relationship between FDI and GDP-growth.
For six counties where there is no cointegration relationship between the log of FDI and growth, only one country exhibited Granger causality from FDI to growth.
According to Nguyen and Haughton (2002) the Bilateral Trade Agreement has lead to 30 per cent more FDI into Vietnam in the first year, and an eventual doubling of the flow. Result would boost economie growth by 0.6 percentage points annually.
Choe (2003) uses the traditional panel data causality testing method developed by Holtz-Eakin et al. (1988) in an analysis of 80 countries. His results point towards bi-directional causality between FDI and growth, although he finds the causal impact ofFDI on growth to be weak.
Research by the Federal Reserve Bank of Dallas indicates that Foreign Direct Investment has the potential to boost technology, productivity, investments and savings although academies, economists and policy makers are yet to establish robust positive relationship.
Recent empirical studies show that the impact of foreign direct investment on economie growth is not straight forward as previously envisaged but that it depends on country specifie factors.
Carkovic and Levine (2005) found that a country's capacity to benefit from foreign direct investment extemalities is limited by local conditions, such as the development of local financial markets or the educationallevel of the country's population. These fmdings were consistent with those of Alfaro et al. (2004) and Durham (2004), who found that only countries with well-established financial markets benefit from foreign direct investment.
Oteng-Abayie and Frimpong (2006) using a data sample from 1970-2002 found that FDI and labour force impact negatively on growth while openness of the economy and capital formation have a positive growth impact in Ghana.
In his study, Buckley et al. (2002) analysed the relationship between foreign direct investment and economie growth in the provinces of China. The findings of this study indicate that there exists a positive relationship between foreign direct investments and economie growth, which was partly attributed to the high technical awareness of the work force.
Similarly, Bengoa and Sanchez-Robles (2003) found that foreign direct investment has a significant positive impact on economie growth of developing countries but that the magnitude ofthe impact is also dependent on the conditions in and characteristics of the host country.
CHAPTER FOUR
METHODOLOGY, ESTIMATION AND ANALYSIS OF RESULTS
In this chapter, we consider the methodology used for the study, collection and measurement of data, model specification and estimation. The concluding part of this chapter focuses on the analysis of the results. In this study two methods are used to analyse the relationship between FDI and economie growth. The two statistical methods used are; the Ordinary Least Squares (OLS) method and Granger Causality test.