Relationship Between FDI and Economic Growth in the Presence of Good Governance System - Dissertation Assignment Help

Assignment Task:

Title and Aim of Research 

Relationship between FDI and Economic Growth in the presence of Good Governance System: Evidence from OECD Countries.

• Aim of Research
  The purpose of this research is to examine the relationship between Foreign Direct Investment, FDI (the main Independent Variable) and Economic Growth (the Dependent Variable) of 10-15 OECD Countries over 20/30 year of 1986 to 2013. This research will also attempt to show other determinants that significantly affect economic growth such as Capital (CAP), Labour (LAB), Corruption control (COC), Regulatory quality (REQ), Government effectiveness (GOE), Political stability (POS), and Voice and accountability (VAC).

DATA WILL DERIVED FROM:

World Development Indicators (managed by the World Bank) – FDI and GDP

Penn World Tables v.9.0 - Capital and Labour

Worldwide Governance Indicators – the determinants of institutional quality.

Methodology

TWO TECHNIQUES: 

• Fixed effect model 

• The GMM estimator

The GRANGER CASUALITY test – shows that bidirectional causal relationship exists between FDI and REGULATORY QUALITY on economic growth.

Whereas, the unidirectional causal relationship is found between CORRUPTION CONTROL, POLITICAL STABILITY, VOICE and ACCOUNTABILITY, GOVERNMENT EFFECTIVENESS and ECONOMIC GROWTH. 

The study’s hypotheses are:
????0: Foreign Direct Investment has a significant positive impact on economic growth
????1: Foreign Direct Investment does not have a significant positive impact on economic growth 

ANALYSIS

• All the variables have a significant positive relationship with economic growth.
• Interaction terms were developed and show the same positive effect on economic growth.
• The more the country maintain their institutional quality the better will be the economic growth and the FDI inflows.
• This results to give valuable policy implementations, which the government should need to focus in order to improve their economic growth.
• Policymakers should draft effective government policies that improve institutional quality measures. The radical changes should be made in the laws related to the corruption, improving the regulatory quality.

TESTS: 

1. Descriptive Statistics

2. Unit root test – IPS and LLC – Variables should be non-stationary at all level, becomes stationary at 1st difference which means the series doesn’t exhibit unit root problems

(Levin et al. (2002) suggests that this test does not give efficient estimates when sample size exceed more than 250 cross-sectional units|)

3. Cointegration test – Pedroni technique, all in all, the six models, the Panel v-statistic, Panel rho-statistic and group rho-statistics show the acceptance of the null hypothesis, 

Whereas, 

The rest four, Panel PP statistic, Panel ADF statistic, Group PP statistic, Group ADF statistic shows the rejection of the null hypothesis and accepts the alternative hypothesis which implies that the under examined variables are co-integrated in the long run.

The long run association among the variables is also analysed by using the Kao cointegration test. The result also shows the existence of cointegration among all the variables used in this study. 

4. Long run estimation – fixed effects regression model, Hausman test confirms FE

5. Robustness Check – Result of FE is analysed by using sensitivity GMM estimator

6. Results of interaction terms – (to explore the impact of institutional quality on FDI and EG) using FE model. There is a significant positive effect on economic growth.

Robustness analysed using GMM estimator

7. Granger Causality Test – The result shows that the bi-directional causality exists among the FDI and economic growth, regulatory quality and economic growth. This implies that FDI and regulatory quality cause the economic growth and the vice versa. Moreover, the unidirectional causal relationship exists among the corruption control, political stability, voice and accountability, government effectiveness and economic growth. This implies that these variables cause the economic growth and not vice versa. 

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