Group 12 - Factors Affecting FDI in Developing Countries from 2011 - 2019 PDF

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FOREIGN TRADE UNIVERSITY------oOo------ECONOMETRICS REPORTFactors Affecting FDI in Developing Countries from 2011 - 2019Lecturer: Dr. Vu Thi Phuong MaiClass ID: KTEE310 (1/2122).Members: 1. Nguyen Linh Khanh – 2012340022 2. Nguyen Nhat Linh – 2013 3. Le Ngoc Ly – 2012340032 4. Vu Hanh Nguyen - 20123...

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FOREIGN TRADE UNIVERSITY ------oOo------

ECONOMETRICS REPORT

Factors Affecting FDI in Developing Countries from 2011 - 2019 Lecturer: Dr. Vu Thi Phuong Mai

Class ID: KTEE310 (1.1/2122).1

Members: 1. Nguyen Linh Khanh – 123456782345 2012340022 2. Nguyen Nhat Linh – 12345678765432 2013 3. Le Ngoc Ly – 123456787654 2012340032 4. Vu Hanh Nguyen - 1234567876543 2012340042

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Ha Noi, 10/2021

Table of Contents INTRODUCTION .......................................................................................................................... 4 I.

Rationale .............................................................................................................................. 4

II. Objectives ............................................................................................................................ 4 III. Subjects and scope of study ................................................................................................. 5 SECTION 1. OVERVIEW OF THE TOPIC .................................................................................. 6 1.

Definition of Foreign Direct Investment.............................................................................. 6

2.

Foreign direct investment in developing countries .............................................................. 6

3.

4.

2.1.

Developing countries .................................................................................................... 6

2.2.

Foreign direct investment in developing countries....................................................... 7

Economic theories ................................................................................................................ 7 3.1.

Gross fixed capital formation (% of GDP) ................................................................... 7

3.2.

Gross Domestic Product per capita .............................................................................. 8

3.3.

Labour force: ................................................................................................................ 9

3.4.

Transports services: ...................................................................................................... 9

3.5.

Profit tax ..................................................................................................................... 10

3.6.

Inflation, GDP deflator ............................................................................................... 11

3.7.

Political stability and absence of violence/ terrorism ................................................. 11

Related published researches: ............................................................................................ 12

SECTION 2: MODEL SPECIFICATION .................................................................................... 14 1.

2.

Methodology in the study .................................................................................................. 14 1.1.

Method to derive the model ........................................................................................ 14

1.2.

Method to collect and analyse data............................................................................. 14

Theoretical model specification ......................................................................................... 14 2.1.

Specification of the model .......................................................................................... 14

2.2.

Explanation of the variables ....................................................................................... 16

2.3.

Description of the data................................................................................................ 17

SECTION 3: ESTIMATED MODEL AND STATISTICAL INFERENCE ................................ 20 1.

Estimated Model ................................................................................................................ 20 1.1.

Estimated result .......................................................................................................... 20

Factors Affecting FDI in Developing Countries from 2011 - 2019

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2.

1.2.

The sample regression model ..................................................................................... 20

1.3.

The coefficient of determination ................................................................................ 21

1.4.

Meaning of estimated coefficient ............................................................................... 21

1.5.

Other result analysis ................................................................................................... 22

Hypothesis Testing............................................................................................................. 23 2.1.

Testing the significance of an individual coefficient βj ............................................. 23

2.2.

Testing the significance of the model ......................................................................... 25

2.3.

Testing the assumptions of the classical model .......................................................... 26

CONCLUSION ............................................................................................................................. 29 POLICY RECOMMENDATIONS .............................................................................................. 30 REFERENCES ............................................................................................................................. 31 APPENDIX ................................................................................................................................... 32 1.

Abbreviations......................................................................................................................... 32

2.

List of countries ..................................................................................................................... 33

INDIVIDUAL ASSESSMENT .................................................................................................... 35

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INTRODUCTION I.

Rationale

Living in a golden age of advancements, econometric has been a science with many practical applications, especially on socioeconomic matters. Econometrics is the quantitative application of statistical and mathematical models using data in order to generate theories or test hypotheses in economics, as well as forecast future trends based on historical data. It runs statistical tests on realworld data before comparing and contrasting the results with the theory or theories being tested. As economics students, we understand the importance of studying and researching econometrics. Foreign direct investment (FDI) is an integral part of an open and effective international economic system and a major catalyst to development. Yet, the benefits of FDI do not accrue automatically and evenly across countries, sectors and local communities. National policies and the international investment architecture matter for attracting FDI to a larger number of developing countries and for reaping the full benefits of FDI for development. The challenges primarily address host countries, which need to establish a transparent, broad and effective enabling policy environment for investment and to build the human and institutional capacities to implement them. Therefore, our group has come to a decision of choosing this topic for our report: “Factors Affecting FDI in Developing Countries from 2011 - 2019”. II.

Objectives

This report will analyse the impact of following factors on FDI in developing countries from 2011 - 2019: Gross fixed capital formation; Gross domestic product per capita; Labour force; Profit tax; Transport services; Inflation, GDP deflator and Political stability and absence of violence/terrorism. Further description will be continuously attached to each section for further understanding. This report ends with reasonable summary and conclusions. From the result, our group may suggest some solutions to increase the foreign direct investment in developing countries.

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III. •

Subjects and scope of study Subjects of this study are the Factors Affecting FDI in Developing Countries from 2011 - 2019 period. Factors examined in this study include: Gross fixed capital formation; Gross domestic product per capita; Labour force; Profit tax; Transport services; Inflation, GDP deflator and Political stability and absence of violence/terrorism with the sample of 525 observations.

•

Scope of study: Observations are taken from 82 developing countries from 2011 – 2019.

The report contains the following contents: •

Introduction

•

Section 1. Overview of the topic

•

Section 2. Model specification

•

Section 3. Estimated model and Hypothesis testing

•

Conclusion

•

Policy recommendations

•

References

•

Appendix

•

Individual assessment

During the process of making this report, due to the limited amount of time as well as some certain limits in understanding and data collecting, the report may hardly avoid mistakes. We are looking forward to your comments for the betterment of our group’s performance. Through this report, we sincerely appreciate and value the insights and guidance that Dr. Vu Thi Phuong Mai provided us.

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SECTION 1. OVERVIEW OF THE TOPIC 1. Definition of Foreign Direct Investment FDI is the net transfer of funds to purchase and acquire physical capital, such as factories and machines. For instance, Nissan, a Japanese firm, building a car factory in the UK. In recent years, Foreign direct investment has also widened to include the purchase of assets and shares which give investors a management interest in a firm. The World Bank defines Foreign direct investment as: “Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments” (World Bank) Foreign direct investment should be distinguished from portfolio transfers (for example, moving financial capital to foreign bank accounts) this is known as indirect investment. However, to complicate things, if there are portfolio transfers which lead to a foreign investor controlling a management share in the company, then this may be considered Foreign direct investment because of the transfer of ownership.

2. Foreign direct investment in developing countries 2.1. Developing countries A developing country (or a low and middle income country (LMIC), less developed country, less economically developed country (LEDC) or underdeveloped country) is a country with a less developed industrial base. Given the potential role FDI can play in accelerating growth and economic transformation, developing countries are strongly interested in attracting it. They are taking steps to improve the principal determinants influencing the locational choices of foreign direct investors.

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2.2. Foreign direct investment in developing countries While FDI represents investment in production facilities, its significance for developing countries is much greater. Not only can FDI add to investible resources and capital formation, but, perhaps more important, it is also a means of transferring production technology, skills, innovative capacity, and organizational and managerial practices between locations, as well as of accessing international marketing networks. The first to benefit are enterprises that are part of transnational systems (consisting of parent firms and affiliates) or that are directly linked to such systems through non-equity arrangements, but these assets can also be transferred to domestic firms and the wider economies of host countries if the environment is conducive. The greater the supply and distribution links between foreign affiliates and domestic firms, and the stronger the capabilities of domestic firms to capture spillovers (that is, indirect effects) from the presence of and competition from foreign firms, the more likely it is that the attributes of FDI that enhance productivity and competitiveness will spread. In these respects, as well as in inducing transnational corporations to locate their activities in a particular country in the first place, policies matter.

3. Economic theories This study attempts primarily to determine which factors significantly affect the increase in FDI inflows in developing countries. The dependent variable in this study is FDI while the independent variables include Gross fixed capital formation; Gross domestic product per capita; Labor force; Profit tax; Transport services; Inflation, GDP deflator and Political stability and absence of violence/ terrorism which are explained as follows.

3.1. Gross fixed capital formation (% of GDP) Gross fixed capital formation (formerly gross domestic fixed investment) includes land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; and the construction of roads, railways, and the like, including schools, offices, hospitals, private residential dwellings, and commercial and industrial buildings. According to the 1993 SNA, net acquisitions of valuables are also considered capital formation. Data is in % of GDP.

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The relationship between Gross fixed capital formation and FDI witnessed in most studies is the impact of FDI by expressing FDI as a percentage of Gross fixed capital formation in the domestic economy. This ratio is often considered an indicator of the share of domestic capital formation undertaken by foreigners. However, the positive impact of foreign firms on domestic capital formation is not necessarily related to their initial investment size, but includes other factors, such as the number of interactions between any domestic firm and any foreign firm. In developing countries local firms may lack access to foreign markets and technology, and therefore suffer from “binding constraints" (Rodrik, 2006) to growth that inhibit their investment behaviour. The entry of Multinational Enterprises (MNEs) could serve as a vehicle for domestic firms to get access to new technology and possibly also to larger foreign markets, to the extent that they can enter into arm’s length relationships with more productive firms that can exploit larger international distribution networks, thereby increasing the profitability of domestic investment.

3.2. Gross Domestic Product per capita Generally, GDP per capita is the gross domestic product divided by the mid-year population. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. Data are in current U.S. dollars. As far as the relationship between GDP per capita and FDI is concerned, Callen (2008) argues that changes in the output of goods and services per person (GDP per capita income) are commonly used as a metric or indicator of whether a country's average citizen is better or worse off. This is massively crucial for investors as it could be taken as an indication of the purchase power of these citizens and would in turn encourage such investors to favor a particular country over another. In this context, Asiedu (2002) found a positive relationship between the two variables: GDP and FDI. According to the researcher, a higher GDP per capita implies better prospects for FDI in the host country. Another recent study was conducted by Kureþiü, Luburiü and Šimoviü (2015) who attempted to examine the interdependence of GDP per capita and foreign direct investment in the transitional economies of Central and Eastern Europe. The researchers argued that scarce research

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seems to have dealt with the construct of GDP per capita as a potential determinant explaining why some states are more attractive to the FDI than others. Such cases are well applied under developing economies as GDP is one of the dominating determinants in attracting FDI especially from developed countries.

3.3. Labour force: The labor force, or currently active population, comprises people ages 15 and older who supply labor for the production of goods and services during a specified period. It includes people who are currently employed and people who are unemployed but seeking work as well as first-time jobseekers. Not everyone who works is included, however. Unpaid workers, family workers, and students are often omitted, and some countries do not count members of the armed forces. Labor force size tends to vary during the year as seasonal workers enter and leave. In line with previous discussion, it is evidently claimed that the quantity and quality of laborers are considered to be one of the crucial factors attracting FDI inflows from foreign affiliates in developing countries. However, in this paper, our group will concentrate on the relationship between labor force participation rate and an increase in FDI inflows, which is confirmed to be positive.

3.4. Transports services: According to World Bank’s Investment Climate Surveys, about 10 percent of respondents rate transport as a “major” or “severe” constraint to investing. Transport covers all transport services (sea, air, land, internal waterway, pipeline, space and electricity transmission) performed by residents of one economy for those of another and involving the carriage of passengers, the movement of goods (freight), rental of carriers with crew, and related support and auxiliary services. Also included are postal and courier services. Data is in the % of commercial services. In the literature, there has been a general consensus that transport infrastructure quality is a crucial motivator for FDI inflows. It is stated that the provision of good quality and well-developed

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transport infrastructure in a host country enables foreign firms to minimize transportation and communication costs in their production activities, and thus increasing the productivity potential of investments in that country, and therefore stimulates FDI flows towards the country (Morriset, 2000; Jordaan, 2004). According to Krugman (19...