Transcript FDI AND GROWTH IN THE SOUTH COUNTRIES OF THE …

FDI AND GROWTH IN THE SOUTH COUNTRIES OF THE
MEDITERRANEAN BASIN: AN ESTIMATION WITH A
STRUCTURAL MODEL
Marouane ALAYA
C.E.D, University of Bordeaux IV
In the 1950s and 1960s FDI and MNEs was considered
by many developing countries as a menace to the
national sovereignty and detrimental to the economic
development.
Over the last couple of decades, the attitude towards
inward foreign direct investment has changed
considerably, as most countries have liberalized their
policies to attract investments from foreign
multinational corporations.
FDI is now considered as an important tool for
economic development. This change of attitude toward
FDI can be explained by many factors such a the
worldwide context of economic liberalisation and the
pressure on LDCs to resolve their economic problems
like unemployment, the lack of domestic investment
ant the need to have modern technologies.
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Like many other developing countries, Southern
Mediterranean Countries have made the remarkable
transformation from being hostile to foreign direct
investment in the 1970s to eagerly attracting
multinational firms.
Although having real advantages such as their
geographical proximity to the European Union and a
relatively cheap labour cost, the economies of the South
shore of Mediterranean are excluded from the surge of
FDI toward the emerging countries.
It’s interesting to sea how the foreign direct investment
has contributed to the economic growth of
Mediterranean LDCs.
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Our proposal can be justified by the important potential
effect of FDI on host economies such as described by
many scholars and empirical studies about this topic. In
fact for the vast majority of politicians, international
institutions, and economists, FDI appears to be a sort of
panacea for every economic problem. Its positive impact
on economic growth has acquired the status of
conventional fact. The almost desperate effort efforts of
many countries to attract as much FDI as possible
indirectly support this point of view.
The advanced general argument is that the FDI can
contribute to the economic development thanks to the
spillovers effects which occur through the development of
human and physical capital, the intensification of
international trade and the transfer of technology.
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Activity
Human Resources Development
 Training in foreign affiliates.
Training rendered to personnal in linkage
activities.
. Financial contributions to Education
Institutions.
Health and Nutrition
Investment in health and nutrition
activities.
Technology Transfer
 Transfert of most recent technology to
affiliates.
Importation of new capital goods and
equipment.
Introduction of R&D in overseas
subsidiaries.
 Selling or licensing old technology.
A Technical assistance rendered to
suppliers and consumers in linkage
activities.
Positive Spillover Effects
Raises productivity by increasing
capability to accept and adopt new
technology and knowledge.
Acquisition of skills – increases
productivity and average level of skills of
country.
Facilitates the diffusion of technology.
 Facilitates the transfer of foreign
management methods and worker
discipline.
Promote entrepreneurship
Improves efficiency of labour-intensive
process.
Transfers technology to host country.
Improves product quality and range; and
production process and hence factor
productivity by lowering unit costs.
Induces competition, encouraging local
firms to increase R&D and therefore
innovation.
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Activity
Positive Spillover Effects
Capital Formation
* Investing retained earnings.
* Payement of taxes, contractuel fees.
*Indirect
contribution
through
linkage activities.
- Tax payment by suppliers.
International Trade
*Involvment in international trade
- Imports of parts of components
from investing countries.
- Exports of finished products to
investing countries and thirdcountry market.
Exportations des produits finis au
pays d’origine et à un pays tiers.
*Provision of marketing, distribution,
product design, quality standards,
brand name use, etc.
*Increases quality and quantity of host
country’s stock of physical capital.
* Increases ratio of investment/GDP
* Increases competition and therefore
efficiency of investment.
*Stimulates local investment by buying
locally.
*Increases international trade by
providing opportunities to expand and
improve production of goods and
services.
*Increases demand for host country’s
products.
*Increases competition and hence
promotes innovation and product quality.
*Eases supply contraints of host country.
*Exposes
exporting
firms
to
international techniques in marketing,
processing and other information.
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The spillover effects of FDI are interlinked,
complementary and cannot possibly be
discussed separately. The interaction is such
that gains in one factor may stimulate
improvement in one or more of the others, thus
magnifying the stimulus or forming a synergy.
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Presentation of the model
Gr = ƒ (FDI, KH, EXPORT, DI)
[eq.1]
DI = ƒ(Gr,FDI, CREDIT, INTEREST, DS)
[eq.2]
EXPORT=ƒ(FDI, XR,Btrade)
[eq.3]
KH=ƒ (FDI, GE, Urban, TEL)
[eq.4]
FDI = ƒ (Cr, ENERGY, KH, OPEN, REM)
[eq.5]
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Domestic Investment (DI)
DI=ƒ (Gr, FDI,CREDIT, INTEREST, DS)
+ +/+
+
Human Capital (KH)
KH=ƒ (FDI,GE,Urban,TEl)
+ +
+
+
Exports
(EXPORT)
EXPORT = ƒ (FDI, XR, Btrade)
+ +
-
Economic Growth
Gr = ƒ (FDI, KH, EXPORT, DI)
+ +
+
+
Foreign Direct Investment (FDI)
FDI = ƒ (Gr, ENERGY,KH, open,REM)
+ +
+
+
+/9
Endogenous variables
Gr : Growth rate of real GDP per capita.
DI: Annual percentage ratio of gross fixed capital
formation to GDP.
EXPORT: Total annual exports of goods and
services as a percentage ratio of GDP.
FDI: Annual percentage ratio of FDI to GDP.
KH: School enrolment, secondary (% gross).
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Exogenous variables
Btrade: Taxes on international trade in percentage of current
revenue (approximation of transaction costs at export).
CREDIT: Domestic credit to the private sector expressed as
percentage ratio of GDP (approximation of the availability of
financial institutions).
GE: Annual government expenditure on education as a
percentage ratio to GDP.
ENERGY: Energy production (KT of oil equivalent).
DS: Gross domestic savings (% of GDP).
INFLATION: GDP deflator (annual %).
INTEREST: Real interest rate (%) (the cost of capital).
M2: Money and quasi money as a percentage of GDP
(approximation of financial market).
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Exogenous variables
OPEN: The level of openness of the economy proxied
by exports plus imports as a percentage ratio of GDP.
GDP: Gross domestic production in million of dollars.
REM: host country’s remoteness is the weight average
distance to all the other countries in the world.
XR: is the exchange rate (local currency per 1US$).
URBAN: Urban population in percentage of total
[approximation of the facility to access at different
institutions (social, cultural, medical, etc)].
TEL: Telephone mainlines per 1000 people
(approximation of telecommunication infrastructure).
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Estimation method
Before proceeding with regression analysis
using the panel data, the results of single
regressions for each county are examined and
in that way clues about possible country
groups which share common growth
elasticities to macroeconomic variables, are
captured. In fact, the southern Mediterranean
countries are too different to be considered an
area, (DREE, 2003 and Giovannetti &
Ricchiuti, 2005).
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Estimation method
Division of the sample in three " homogeneous "
groups.
G1: Morocco, Tunisia, and Turkey.
G2 : Algeria and Egypt.
G3: the third group is formed by Jordan and Syria.
Two- stage least squares (2SLS) estimation technique
has been employed using the panel data from 19752002 for each country’s group and the selection of
fixed effect model.
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Empirical results
Assumption :FDI is of vertical nature.
The determinants of FDI.
Variables
Groupe
Gr
KH
Energy
Open
M2
REM
Group1
+**
-
+***
+***
+**
-**
Group2
+**
+*
+***
+**
+*** -
Group3
+**
+***
+***
+
+
-***
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Empirical results
Effects of FDI on economic growth and its
determinants.
Variables
DI
KH
EXPORT Gr
Group1
-***
+**
+**
-**
Group2
+***
+*
+**
+
Group3
+*
+***
-
-***
Groupe
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Conclusion
Empirical results from our model indicate that the
human capital and to a lesser extent exports, are the
most dynamic factors in the creation of positive
spillovers. However, these externalities do not seem to
be important, to generate a positive growth or at least
to compensate for the negative effects of the FDI.
Our finding is in opposition to the generally allowed
idea which tends to suppose that; spillovers benefit
from FDI occur automatically. The euphoria of the
developing countries in attracting the international
investment could be an irrefutable proof.
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For developing countries and particularly for
Southern Mediterranean countries, the central
challenge is not to attract FDI (since this doesn’t
constitute a guarantee for having beneficial
effects of FDI), but to know how to reap
advantages from the presence of foreign
affiliates in their countries. So, in their economic
decision, policymakers of Mediterranean LDCs
must take account of the quality of FDI, and
therefore select the appropriate advantages to
attract the right kind of it.
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