Download The effect of Foreign Direct Investment on economic growth in OPEC

The effect of Foreign Direct Investment
on economic growth in OPEC countries
Doortje Broersen
6115888
Business economics
Finance & Organization
05-07-2013
Amsterdam
Jeroen Ligterink
Abstract
This research examines whether the effects of FDI on growth depend on the availability of human
capital, the development of financial markets and the openness of trade in a country. It particularly
focuses on the effects of FDI on growth in OPEC countries. Empirical analysis, using a cross-country
dataset over the period 1980-2011, shows that there is no evidence to believe that FDI has a positive
effect on economic growth in general. It does show a robust positive effect of FDI on economic
growth in OPEC countries. Nevertheless, there is a negative interaction to be found between the effect
of FDI on economic growth in these countries and the fact that these countries are member of OPEC.
Contrary to former research, the results do not show significant interactions between FDI and human
capacity, the level of development of financial markets and openness to trade. Concluding, there is
evidence to believe attracting FDI in OPEC countries has a positive effect on economic growth,
despite the level of human capacity and the level of development of financial markets or the openness
to trade.
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Introduction
The influence of Foreign Direct Investment (FDI) on economic growth is a frequently studied
subject, because people believe attracting FDI could lead to several beneficial effects that lead
to economic growth. FDI is defined as ‘an investment involving a long-term relationship and
reflecting a lasting interest and control of a resident entity in an economy other than that of
the foreign direct investor’ (Alfaro, Chanda, Kalemli-Ozcan and Sayek, 2004). Former
research shows that there can be a positive relation between the level of FDI and economic
growth in a country, if various conditions are met. Especially developing countries can benefit
from stimulating FDI supportive policies. But in former research no distinction is made
between the different economical characteristics of developing countries. The role of this
research is to go deeper into a particular type of countries.
For example, Dubai has been able to build up the massive metropolis as it is now due
to the extensive oil industry, but has developed into a diversified economy. Since the mid1990s more than 90% of the GDP is based on non-oil sectors. This is a result of, inter alia, the
strong focus on the tourist sector, by promoting the real estate sector, the expansion of
commercial infrastructure and the introduction of free zones designed around one or more
business industries. This diversification in combination with a stable political background has
led to a favourable macro economic environment and to attracting a great level of FDI
(Davidson, 2008). Taking Dubai as an example, the diversified economy and strong focus on
non-oil sectors have led to a high level of FDI. But is there any evidence to believe this will
have a positive effect on economic growth?
Since 1980s, not only Dubai, but also other petroleum exporting countries have
supported FDI stimulating policies. This research will focus on the effect of FDI on economic
growth in these countries. From this research we can learn if member countries of the
Organization of Petroleum Exporting Countries (OPEC) should support FDI stimulating
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policies. Leading to the following questions, is there a positive effect of FDI on economic
growth to be found in these countries? Is there a significant difference between the possible
effect of FDI on economic growth between developed countries and countries that are
member of the Organization of Petroleum Exporting Countries (OPEC)? Are there other
factors that influence the possible effect of FDI on economic growth?
This research examines whether the effects of FDI on growth depend on the
availability of human capital, the development of financial markets and the openness of trade
in a country. It particularly focuses on the effects of FDI on growth in OPEC countries.
Empirical analysis, using a cross-country dataset over the period 1980-2011, shows that there
is no evidence to believe that FDI has a positive effect on economic growth in general. It does
show a robust positive effect of FDI on economic growth in OPEC countries. Nevertheless
there is a negative interaction to be found between the effect of FDI on economic growth in
these countries and the fact that these countries are member of OPEC. Contrary to former
research, the results do not show significant interactions between FDI and human capacity,
the level of development of financial markets and openness to trade. Concluding, there is
evidence to believe attracting FDI in OPEC countries has a positive effect on economic
growth, despite the level of human capacity and the level of development of financial markets
or the openness to trade.
The remainder of the thesis is structured as followed; the first section gives a brief
explanation of the relevant literature about the effects of FDI on economic growth. The
following section provides a description of OPEC and its member countries and explications
of the hypotheses. The third section describes the data and methodology of the empirical
research. The fourth section discusses the results. The fifth section contains the conclusions
and discussion.
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Foreign Direct Investment
In this section, based on previous research, a specification of the effect of FDI on economic
growth in a country and the different factors that influence the beneficial effects of FDI are
given. Since the 1980s the amount of FDI attracted in developing countries has strongly
increased covering half of all the private capital flows in 1998. Due to the debt crisis and
financial distress from emerging markets, policymakers in developing countries started to
provide incentives to stimulate the level of FDI in the host country. They believed it would
result in several benefits like advanced technologies and other spillovers (Alfaro et al. 2004).
According to Borentzein, De Gegorio and Lee (1998) economic growth in developing
countries can be influenced by introducing new technologies that already exist in developed
countries. They believe FDI could be a major channel for advanced technology transfers. But
as long as there is a certain level of human capacity available in the host country, with the
ability to absorb the knowledge. In order to empirical justify the statements above; they have
utilized a basic economic growth formulation;
𝑔 = 𝑐! + 𝑐! 𝐹𝐷𝐼 + 𝑐! 𝐹𝐷𝐼 𝑥 𝐻 + 𝑐! 𝐻 + 𝑐! 𝑌 + 𝑐! 𝐴 (1) With FDI is Foreign Direct Investment (as ratio of GDP, similar to the ratio of foreign firms
to the total number of firms in the host country), H is stock of human capacity, Y the initial
GDP per capita and A is a set of other variables that affect economic growth. The set of other
variables includes; government consumption, sub-Saharan African dummy, Latin American
dummy and other variables that measure political instability and financial development. Using
a dataset of 69 developing countries and a time frame of two decades (1970-89), the main
results of the regression (they made use of the SUR (Seemingly Unrelated Regression)
Model) indicated there is a strong interaction between FDI and educational attainment, the
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variable they used as proxy for human capacity. This leads to the first hypothesis:
Hypothesis 1: The level of human capacity has a positive influence on the effect of FDI on
economic growth.
The second hypothesis relates to the research of Balasubramanyam, Salisu and
Sapsford (1996). They argue FDI has a beneficial effect on economic growth. But they
believe the effect is stronger in export promoting (EP) countries with a trade neutral strategy,
than in countries that follow an import substituting (IS) strategy. In order for FDI to have a
positive influence on economic growth, there has to be a favourable economical climate. In
this economical climate there should be free market play, competition and neutrality of policy.
The former leads to investments in Research and Development, and human skills. A low level
of government intervention ensures efficient allocation of resources and makes room for
specialisation and economies of scales, so that FDI can be exploited optimally. To test the
hypothesis, Balasubramanyam et al. (1996) have used a model based on a production function
they have transformed into the following growth equation:
𝑦 = α + βl + γ
𝑙
𝐹𝐷𝐼
+ψ
+ ϕx (2)
𝑌
𝑌
With y is the rate of growth in real GDP, L is rate of growth of labour input, I/Y and
FDI/Y are shares of domestic and foreign investment in GDP, and x is growth rate of export.
Using Ordinary Least Squares (OLS) on data of a cross-section of 46 countries over the
period 1970 to 1985 led to the result that, indeed, in export supporting countries, FDI is most
effective in improving growth in the host country.
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Hypothesis 2: Openness to trade is beneficial for the effect of FDI on economic growth.
Alfaro et al. (2004) believe FDI stimulating policies can be very effective in
improving economic growth as long as the local financial markets are well developed. They
state that there are three reasons why external finance is required to realize the positive effects
coming from FDI. First, spillovers that come from FDI are not always costless to implement
in the host organization or workforce. To optimize the benefits, an organization has to change
the structure, hire skilled labour or buy new machinery. Secondly, FDI can increase the
number of potential entrepreneurs, but they need external investments to cover their start up
costs. Additionally, FDI can establish backward linkages, resource channels leading to mutual
dependency between organizations, supporting the development of economies of scale and
creation of new organizations in a later stage. Alfaro et al. (2004) first used a dataset of 71
countries, including 20 OECD (Organization of Co-operation and Development) and 51 nonOECD countries, which didn’t lead to significant results. Secondly, they used a dataset of 20
OECD and 29 non-OECD countries concentrating on different indicators and ran the
regressions using the following equation:
𝐺 = 𝛽′! + 𝛽′! 𝐹𝐷𝐼! + 𝛽 ! ! 𝐹𝐷𝐼! 𝑥 𝐹! + 𝛽′! 𝐹! + 𝛽′! 𝐶! + 𝑣! (3) With G is growth real per capita GDP, FDI is net Foreign Direct Investment inflow reported
in the International Financial Statistics report 2008 of the International Monetary Fund.
Finance is based on four variables; liquid liabilities of the financial system, commercialcentral bank assets, private sector credit and bank credit. C is a selection of control variables
(including; initial income, human capital, population growth, government consumption and
sub-Saharan Africa dummy). From the results retrieved from the second dataset, FDI has
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shown to play an important role in stimulating economic growth, but only for those countries
with developed financial markets. This leads to the third hypothesis.
Hypothesis 3: The level of development of financial markets has an influence on the effect of
FDI on economic growth.
3.
OPEC and its member countries
As indicated, this research will particularly look at the influence of FDI on economic growth
in OPEC countries. For that reason a brief explanation of OPEC and its member countries is
given, followed up by the fourth and fifth hypothesis propositions. OPEC is an
intergovernmental organization existing of 12 members that mostly rely on revenues
generated from the oil sector. The founding countries, Iran, Iraq, Kuwait, Saudi Arabia and
Venezuela, understood the importance of energy resources for industries worldwide and
established the organization in 1960. One could say the organization is rather an international
organization. This because their decision-making has a global effect on the production level
or energy supply, they can transfer oil from one market to another. Therefore they can also
influence the world market price. Since 1980 the OPEC member countries have progressed
both economically and socially. However the level of development is closely linked to the
profit generated from the oil sector. This because it creates investment opportunities in the
same industry but also in broader economic development. Although the revenues will most
likely continue to increase in the future, the sources are not inexhaustible; therefore the
member countries will have to diversify their economies (Khusanjanova, 2011).
Illustrated by the example of Dubai, in the process toward a diversified economy,
attracting FDI is believed to be favourable, since it could result in several benefits like
advanced technologies and other spillovers. Nonetheless, previous studies have proven there
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should be a favourable (macro economic) environment. Since the OPEC member countries
are located all over the world, there are geographical and political differences, making it
complicated to describe a common environment (regardless of the fact if it is favourable or
not). However there are similarities and shared difficulties that correspond to the different
member countries. At large, OPEC member countries are developing countries, (oil) exports
oriented and have open economies (Darrat, 1986). One of the aims of the organization is
economical development in the member countries and they emphasis on the importance to
continue and increase investments in all areas. But it appears they have had difficulties fully
managing the conversion of their enormous ‘oil’ fortune in human and physical capital, that
should ensure sustainable economical development (Khusanjanova, 2011). Besides, the profit
generated from the oil sector not only determines the level of investments in economical
development, it also influences government revenues in the member countries. As a result
fluctuations in the world oil price can lead to alternating regulations and political instability.
Finally, in most of the OPEC member countries, the financial markets (apart from commercial
banks) are still relatively underdeveloped, confronting them all (to a lesser extend) with
limited access to external financial resources (Darrat, 1986).
Getting back at the question if FDI has a positive effect on economic growth in
the OPEC member countries, in the process to a diversified economy, FDI could be a major
channel for advanced technology transfers by creating backward linkages. It could introduce
new technologies and increase the number of potential entrepreneurs of new organizations in
a later stage. On the other hand, as mentioned before the beneficial effects of FDI on
economic growth can only be exploited as long as there is a favourable economical climate
and specific conditions are met. Borentzein et al. (1998) believe there has to be a certain level
of knowledge absorptive human capacity available, while OPEC member countries still have
a hard time to manage the conversion of their oil fortune in human and physical capital
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(Khusanjanova, 2011). Secondly, local financial markets have to be well developed to
implement the benefits that arise form FDI (Alfaro et al. 2004), where OPEC member
countries are struggling with limited access to external financial resources (Darrat, 1986)
Balasubramanyam et al. (1996) stress on the importance of free market play, competition and
neutral policy, for FDI to have a beneficial effect on economic growth. Due to the
geographical and political differences it is hard to define the overall export strategy. Although
the OPEC member countries are oil export oriented, because of their dominant role in this
sector, it is hard to say they have trade neutral strategies (Darrat, 1986).
To summarize, FDI could have a positive effect on the desired economic growth in
OPEC member countries, but the corresponding aspects of the member countries’ economical
environments do not contribute (or in a lesser extent) to this beneficial result. This leads to the
fourth hypothesis:
Hypothesis 4: FDI has little to no effect on economic growth in OPEC countries.
The fifth hypothesis relates to effect of FDI on economic growth in developed countries. In
developed countries the positive influence of FDI on economic growth should be intuitively
higher than in OPEC countries. This because conditions like a high level of human capacity,
export supporting strategies and developed financial markets are satisfied. But former
research shows the effects are only significant in developing countries. The magnitude of the
spill over effects that lead to economic growth are expected to be less in countries that have a
certain level of economical development already (Alfaro et al. 2004). This leads to the final
hypothesis.
Hypothesis 5: The effect of FDI on economic growth is higher in OPEC countries in
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comparison with developed countries.
4.
Data and Methodology
This section of the research describes the data and the econometric model used to assess the
relationship between FDI inflows and economic growth in OPEC member countries. A crosscountry dataset is created from 23 advanced countries (Barro and Lee, 1996) and the 12
OPEC member countries (see Appendix A for the sample countries), over the period from
1980 till 2011. The decision to consider this timeframe is based on the ability to collect the
data from the OPEC countries. It is important to mention, creating a dataset including this
specific group of OPEC countries might have an influence on the significance of the empirical
research. According to Jiménez-Rodríguez and Sánchez (2005) oil exporting countries have
on average higher economic growth rates than other developing countries, that are oil
importing countries. In addition, the fact that these petroleum exporting countries are member
of OPEC, could result in higher economic growth as well. The countries are not randomly
selected.
The econometric approach used is a panel data simple ordinary least square (OLS)
regression (one observation per variable per country over the 1980-2011 period), with the
following simplified form: 𝐺 = 𝛼 + 𝛽𝐹𝐷𝐼 + 𝛾𝐶 + 𝜀 (4)
G equals the growth rate of the economy: growth of real per capita GDP. FDI is Foreign
Direct Investment inflows as share of GDP (Alfaro et al. 2004). ε corresponds to the error
term. As in the research of Alfaro et al. (2004) to control for other growth determinants, the
following control variables are included (denoted by C in the regression); Initial income,
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Human Capacity and Government consumption. Initial income is initial GDP per capita,
Human Capacity equals average years of secondary schooling and Government consumption,
government size as a share of GDP (Borentzein et al. 1998). Other included variables are
Development of financial market. According to Beck, Levine and Loayza (2000) private
credit is the primary measure of financial intermediary development. Private credit equals the
value of credits by financial intermediaries to the private sector. Openness to trade is export
plus import as share of GDP (Balasubramanyam et al. 1996), and inflation, average growth in
consumer price index (Alfaro et al. 2004). Jiménez-Rodríguez and Sánchez (2005) believe a
rise in oil price has a negative impact on GDP growth and so oil price is included as a
variable. Oil price equals average real world price of crude oil . To control for crisis periods,
the dummy variable Crisis is included (Laeven and Valencia, 2012). The variable for OPEC
countries is included as the OPEC dummy variable. (See Appendix B for detailed descriptions
and sources of the data).
Table 1 presents the summary statistics and correlations of the cross-country dataset
over the period 1980 until 2011. The table shows that there is considerable cross-country
variation and major differences in numbers within one country can also be found. For
instance, the mean of real growth of GDP per capita is for the sample 1.29 percent, with a
standard deviation of 4.62. The real growth of GDP per capita in Iraq was -42.77 percent in
2004, followed by a growth of 42.38 percent in 2005 (minimum and maximum). Table 2
shows the differences between Non-OPEC and OPEC countries. The mean of growth is 1.703
percent with a standard deviation of 2.94 in Non-OPEC countries, whereas it is 0.29 percent
with a standard deviation of 7.48 in OPEC countries. Thus, from the results the percentage of
growth fluctuates a lot more in OPEC countries in comparison to non-OPEC countries. This is
also reflected in the estimated minimum and maximum values. The minimum and maximum
value in Non-OPEC countries are respectively -8.97 and 9.81 percent, in the OPEC countries -
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42.77 and 42.83 percent. Table 3 shows the differences in statistics between high growth and
low growth OPEC countries. The mean of growth in high growth OPEC countries is 1.19
percent, with a standard deviation of 7.24. The growth percentage of low growth OPEC
countries has a negative mean of -0.63 and a standard deviation of 6.13. For both the high
growth and low growth OPEC countries the estimated growth percentage fluctuates violently.
The data outcomes also suggest a major variation in Foreign Direct Investment. The mean of
net Foreign Direct Investment was 2.51 percent, with as standard deviation 7.09. In 1999
Angola had net inflows of more than 144 percent of their GDP (maximum), while Austria had
net inflows of -6,71 percent in 2010 (minimum). The growth percentage in Angola in that
same year was 0.39 percent, followed by a decline in growth (-0.06 percent in 2000 and -0.17
percent in 2001). The growth percentage in Austria in 2010 was in contrast positive with 1.75
percent (followed by 2.28 percent in 2011). This could mean FDI has a reverse effect on
economic growth. Table 2 shows a small difference in mean of FDI between Non-OPEC and
OPEC countries. The mean in Non-OPEC countries is 2.54 percent, whereas it is 2.47 percent
in OPEC countries. However, the standard deviation is 4.31 in Non-OPEC countries and
10.69 in OPEC countries, thus more fluctuations in FDI percentage in OPEC countries.
Between high growth and low growth OPEC countries there is little difference in FDI, with a
mean of 1.41 percent (standard deviation of 1.74) in high growth and 1.19 percent (standard
deviation of 1.88) in low growth OPEC countries. Looking at initial income, Table 1 shows
again cross-country variation. The average is 588,69 US dollars, with a standard variable of
3971.15. Turkey had a real GDP per capita of 90785,13 US dollar in 1980 (maximum), where
Algeria had the minimum value of 1,08 US dollar 24 years later (minimum). Turkeys’ growth
percentage in 1980 was stated at -4.60 percent. In Algeria the growth percentage was 3.63
percent in 2004. This could mean a higher initial income means a lower growth percentage.
The mean of average years of schooling for the sample is 3.21 years, with a standard
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deviation of 1.21. The maximum average years of schooling was 7.48 years shown in
Germany over the period 2001-2005. In the same period the growth percentage fluctuated
from 2.92 percent in 2000 to -0.43 percent in 2003. The minimum average years of schooling
was 0.38 years listed in Libya in 1980. Data on growth in Libya in the same period is hard to
find. As suggested by the sample, the openness of trade (import together with export) mean
was 68.22 percent of GDP, with 31.21 as standard deviation. The maximum and minimum
percentages of GDP were shown in Ireland in 2011 and Iran in 1986 stated at 190.92 percent
and 13.77 percent. The growth percentage in Ireland in 2011 was -1.54 percent, in Iran in
1986 it was -12.48 percent. The mean of private credit was 72.83 percent of GDP, with as
standard deviation 54.50. The maximum percentage of private credit was 319.46 in Iceland in
2006 and the minimum percentage of private credit was 1.54 in Greece in 1983. The growth
percentage in Iceland in that year was 2.28 percent and in Greece in 1983 -1.65 percent. See
Table 1 for the summarize statistics of the variables government consumption, inflation and
oil price. Table 1 also suggests a simple, positive relationship between FDI and growth. This
also applies for human capital and openness to trade. Additionally, it suggests a simple,
negative relationship between growth and initial income, development of financial markets,
government consumption, inflation, the crisis dummy, the oil price and the OPEC dummy.
5.
Results
The purpose of this empirical research is to estimate the effects of FDI on economic growth,
after controlling for other growth determinants and the potential biases. As discussed before,
the research is particularly focused on the FDI effect on growth in OPEC countries. But it also
tests whether the effects of FDI on growth depend on the availability of human capital, the
development of financial markets, the openness of trade in a country. In spite of the carefully
selected variables that are included in the empirical research, the results must be interpreted
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with caution. Due to the difficulties with collecting the (right) data, measurement errors and
omitted variable bias may exist. For example, according to former research the variable black
market premium should be included in the regression, but data relating to this variable is hard
to find. Another issue is the plausible causality problem. For example, the magnitude of FDI
might increase by higher economic growth rates, leading to causality. Suggestions for future
research are discussed in Section 6.
Table 4 shows estimates for a selection of a fixed set of control variables that includes
initial income, schooling, government consumption and varying other control variables
including private credit, openness to trade, inflation, the crisis dummy, oil price and the
OPEC dummy. In the growth regressions (1) and (2) none of the variables enters the
regressions significantly. FDI remains insignificant in regression (7) that includes the OPEC
dummy. FDI becomes significant when controlling for openness to trade, inflation, the crisis
dummy, the oil price (and oil price in combination with the OPEC dummy) in growth
regressions (3) until (6) and (8) and when controlling for all the control variables given. The
empirical evidence does not show a robust result in all the regressions. This means hypothesis
4 is not rejected. Remarkable is the fact that private credit does not enter significantly in any
of the six regressions.
One of the objectives of this research is to assess whether the impact of FDI on growth
is different between OPEC and developed countries. Thus the regression is re-ran, using the
interaction term FDI*OPEC. Table 5 shows that the effect of FDI on growth clearly depends
on whether countries are OPEC or developed countries, because the interaction term
FDI*OPEC enters significantly in the regressions (1) until (6) and (8). In the regressions (7)
and (9), when controlling for OPEC and the entire control set, the coefficients of the
interaction term are somewhat smaller and insignificant. This may in part be due to the OPEC
dummy that captures an important allocation function. The hypothesis that the coefficient of
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FDI is zero is rejected in all regressions. This means in OPEC countries the impact of FDI on
growth is negatively influenced. According to the results hypothesis 5 is rejected. Despite the
negative influence of OPEC on FDI, the results of the regressions do assess a positive effect
of FDI on growth. This means Hypothesis 4 can be rejected.
Borentzein et al. (1998) state FDI could be a major channel for advanced technology
transfers leading to economic growth, as long as there is a certain level of human capacity
available in the host country, with the ability to absorb knowledge. This would mean only
countries with sufficiently high levels of human capital benefit from FDI. Table 6 shows
whether the relationship between FDI and economic growth varies with the average years of
secondary schooling. Only regression (5) demonstrates a significant coefficient on FDI or the
interaction term FDI*schooling. Concluding, table 6 shows there is not enough evidence to
believe the impact of FDI on growth depends on the stock of human capital. This outcome
may be the result of simultaneously including FDI, schooling and the interaction term. But
after repeating the regressions, excluding the variable schooling, the coefficients of FDI and
the interaction term remain insignificant. Thus, based on the results Hypothesis 1 can be
rejected.
Table 7 shows whether the level of financial development influences the impact of
FDI on growth. Alfaro et al. (2004) argue FDI stimulating policies can be very effective in
improving economic growth as long as the local financial markets are well developed. Thus,
the regression is re-ran, including the interaction term FDI*private credit. Both FDI and the
interaction term do not enter significantly in any of the regressions. This means there is no
influence of the development of financial markets on the relationship between FDI and
growth to be found; indicating Hypothesis 3 can be rejected.
According to Balasubramanyam et al. (1996) for FDI to have beneficial effect on
economic growth, there has to be a favourable economical climate, in which there is free
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market play, competition and neutrality of policy. This time, the interaction term openness to
trade is included in the re-ran regressions. Table 8 shows that the hypothesis that the
coefficient of FDI or the interaction term is zero is not rejected in any of the regressions,
implying that the level of trade does not affects the impact of FDI on growth. Based on the
results Hypothesis 2 can be rejected.
6.
Conclusion and discussion
This concluding section summarizes the findings of former research and the findings of this
research on the effect of FDI on economic growth, followed by the discussion of these
findings and the suggestions for further research. The amount of FDI attracted in developing
countries has strongly increased since the 1980s, covering half of all the private capital flows
in 1998. In the last 30 years OPEC member countries have progressed both economically and
socially, mostly due to the profit generated from the oil sector. However member countries
will have to diversify their economies. In the process toward a diversified economy, attracting
FDI is believed to be favourable, since it could result in several benefits like advanced
technologies and other spillovers. Nonetheless previous studies have proven there should be a
favourable (macro economic) environment in the host country. For instance, there has to be a
certain level of knowledge absorptive human capacity available, local financial markets have
to be well developed and there must be openness to trade.
This research tests whether the effects of FDI on growth depends on the above
mentioned factors, but is particularly focused on the FDI effect on growth in OPEC countries.
The empirical evidence shows no robust findings of the possible (positive) effect of FDI on
economic growth. It does show a positive effect of FDI on economic growth in OPEC
countries. Nevertheless there is a negative interaction to be found between the effect of FDI
and the fact that these countries are OPEC member countries. Contrary to former research, the
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results of this empirical research do not show significant interactions between FDI and human
capital, the level of development of financial markets and openness to trade.
One of the limitations of this research is the difficulty of collecting the (right) data.
Although our sample begins with the year 1980, for some of the variables there are no
publications before 1990 or none at all. Especially the data from some of the OPEC countries
(e.g. Angola, Libya, Iraq) are hard to collect. As mentioned before, according to former
research, the variable black market premium should have been included in the regressions.
Buut the data relating to this variable cannot be found, possibly leading to omitted variable
bias. This might also be the case with the variable domestic investment or other variables that
are omitted from the sample. Another issue is the plausible causality problem. The magnitude
of FDI can increase by higher economic growth rates, which leads to causality. This also
counts for the efficiency of financial markets. A suggestion for future research is to construct
instruments for both variables and run an IV regression to verify if it produces different
results in comparison to the OLS regression. Variables that are included, but do not
significantly enter any of the regression (e.g. human capital) can be constructed by different
datasets.
7.
References
Alfaro, L., Chanda, A., Kalemli-Ozcan, S. & Sayek, S. (2004). FDI and economic growth: the
role of local financial markets. Journal of International Economics, 64, 89-112.
Balasubramanyam, V.N., Salisu, M. & Sapsford, D. (1996). Foreign Direct Investment and
Growth in EP and IS Countries. The Economic Journal, 106, 92-105.
Barro, R. & Lee, J.W. (1996). International measures of schooling years and schooling
quality. American Economic Review, 86, 218-223.
Beck, T., Levine, R. & Loayza, N. (2000). Finance and the sources of growth. Journal of
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Financial Economics, 58, 261-300.
Borenztein, E., De Gregorio, J. & Lee, J-W. (1998). How does foreign direct investment
affect economic growth?. Journal of International Economics, 45, 115-135.
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Appendix A: Countries in the sample
Developed countries:
1. Australia
7. France
13. Japan
19. Sweden
2. Algeria
8. Germany
14. Netherlands
20. Switzerland
3. Belgium
9. Greece
15. New Zeeland
21. Turkey
4. Canada
10. Iceland
16. Norway
22. United Kingdom
5. Denmark
11. Ireland
17. Portugal
23. United States
6. Finland
12. Italy
18. Spain
1. Algeria
4. Iran
7. Libya
10. Saudi Arabia
2. Angola
5. Iraq
8. Nigeria
11. United Arab Emirates
3. Ecuador
6. Kuwait
9. Qatar
12. Venezuela
OPEC countries:
Apendix B: Data Descriptions and sources
Growth: the growth rate of the economy, measured by real per capita GDP growth.
Source: World Bank (2013).
Foreign Direct Investment: 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 longterm capital, and short-term capital as shown in the balance of payments. FDI is measured as
net inflows as share of GDP. Source: World DataBank (2013).
Initial Income: GDP per capita is gross domestic product divided by midyear
population. GDP is the sum of gross value added by al resident producers in the economy plus
any product taxes and minus any subsidies not included in the value of the products. Data are
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in current U.S. dollars. Source: World Bank (2013).
Human Capital: Average years of secondary schooling. Source: World DataBank
(2013).
Government consumption: total expenditure of the central government as a share of
GDP. Source: World Bank (2013).
Development of financial markets: Domestic credit to private sector refers to financial
resources provided to the private sector, such as through loans, purchases of non-equity
securities, and trade credits and other accounts receivable that establish a claim for repayment.
Private credit is measured as share of GDP. Source: World Bank (2013).
Openness tot trade: exports plus imports relative to GDP. Source: World Bank (2013).
Inflation: as measured by the consumer price index, reflects the annual percentage
change in the cost to the average consumer of acquiring a basket of goods and services that
may be fixed or changed at specified intervals (yearly). Source: World Bank (2013).
Oil price: average real world price for crude oil in dollars per barrel. Source: World
DataBank (2013).
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