Economic Growth Foreign Direct Investment and Economic Openness An Empirical Study of the US.docx
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Economic Growth Foreign Direct Investment and Economic Openness An Empirical Study of the US.docx
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EconomicGrowthForeignDirectInvestmentandEconomicOpennessAnEmpiricalStudyoftheUS
EconomicGrowth,ForeignDirectInvestmentandEconomicOpenness:
AnEmpiricalStudyoftheU.S.
JeffreyBreece
SchoolofFinance,RenminUniversityofChina,
Beijing,P.R.China
ABSTRACT:
Thispaperanalyzesthecausalrelationshipsbetweeneconomicgrowth,foreigndirectinvestment,andeconomicopennessbyrelyingonU.S.datafrom1960to2010.ThesethreefactorshaveandcontinuetoplayavitalroleinthedevelopmentoftheU.S,mandatinganindepthanalysisoftheirinter-workings.WeestablishaVARframeworktotestforGrangerCausality,inordertoexplorebeyondmerecorrelation.Wefindabilateralcausalrelationshipexistsbetweeneconomicgrowthandeconomicopennessaswellasonefromforeigndirectinvestmenttoeconomicopenness.Weconcludewithseveralpolicyimplicationsthatcanbedrawnfromourfindings.
I.Introduction
TheUnitedStateshastheworld’slargesteconomy,isthelargestrecipientofforeigndirectinvestmentandoneofthemosteconomicallyopencountriesintheworld,accordingtotheHeritageFoundation’sEconomicFreedomoftheWorldIndex.Manyacademiccircleshavenotedthatthisconcurrencecanbynomeansbeacoincidenceandtheremustexistsomeunderlyingconnections.TheseconnectionsmayholdtheanswertohowtheU.S.becamesuchadominantpowerinsuchashortamountoftimeandhowitcanagainenterintoaperiodofprosperity.
Overthelatterhalfofthe20thcenturyandcontinuinguntilthepresentday,thesethreeaspectshaveprogressedinunisonwithoneanother,ascanbeseeninFIGURE1.Especiallyevidentinthedataisthesimilarresponsesofeconomicgrowth(RGDP),foreigndirectinvestment(FDI)andeconomicopenness(measuredastotaltradetorealgrossdomesticproduct)(EO)torecenteconomicshocks.Allthreesufferedsynchronizedperiodsofnegativegrowthfromthebustoftheboom,asinthe3rdquarterof2001whenRealGDPfell0.3%,economicopennessfell0.033%andFDIfell0.88%.Inaddition,themorerecentrecessioncausedbythesub-primemortgagecrisisisalsovisiblethroughallthreefactors,particularlyFDIwhichappearstobemoresensitivethaneconomicgrowthandeconomicopenness.
FIGURE1
Thetandemgrowthofthesethreefactorssuggestsanobviouscorrelationoverthepast50years,butwhataboutcausation?
Howdotheinterdependentworkingsofeconomicgrowth,foreigndirectinvestmentandeconomicopennessallfunctiontogether?
AndwhatrolewillthisplayinthefuturedevelopmentoftheU.S.?
ThispaperexaminesthepreviousquestionsthroughuseofaVectorAuto-regressionframeworkwithhopesofunderstandinghowthesevariablesarerelatedintheU.S.Theremainedofthepaperisorganizedasfollows.AreviewofrelevantliteratureisputforthinSection2.ThedatausedinthisstudyispresentedinSection3.Section4illustratesthemodelsanddiscussestheempiricalresults.Section5concludes.
II.LiteratureReview
Alargeamountofresearchhasbeendedicatedtowardstherespectivefieldsofeconomicgrowth,foreigndirectinvestmentandeconomicopenness.However,thebulkofthisworkisconcernedwithonlyapair-wiseanalysisofthefactors,andeventhen,itispredominantlyconductedonaseriesofdevelopingcountries.ThespecificcaseoftheU.S.isnormallynotconsidered.Nevertheless,manyrecentfindingsareapplicabletotheU.S.overthepast50years.
Therelationshipbetweenthegrowthrateandinflowofforeigndirectinvestmenthasbeenexploredinamannerofdifferentways.BerthelemyandDemuger(2000),whileinvestigating24Chineseprovincesfrom1985to1996,useendogenoussimultaneousequationstorevealforeigndirectinvestments’largepositiveinfluenceoneconomicgrowth.Similarly,Alfaroetal.(2000)arriveatasimilarconclusionwhentheymodelasimpleeconomy,findingthatforeigndirectinvestmentplaysanimportantroleineconomicgrowth,butisdependentonthematurityoffinancialmarkets.Otherstudieshavebeenconductedthatsupportasimilarhypothesis;onefindsthatforeigndirectinvestmentcanleadtohighergrowthrates,especiallyincountriesthataremoreeconomicallyopen(Nair-ReichertandWeinhold2000).AnotherstudyusingGrangerCausalityfindsthatforeigndirectinvestmentcausesgrowththroughknowledgetransfersandtheadoptionofnewtechnology(HansenandRand(2006).However,therehavebeenpaperswhichadvocatethecounterargument.CarkovicandLevine(2002),aftercorrectingforbiasesfoundinpreviousstudies,concludethatforeigndirectinvestmentdoesnothaveasignificanteffectongrowth.
Conversely,apaperputforthbyChowdhuryandMavrotas(2006)findthatinthecaseofChile,adevelopingcountryandinmanywayscomparabletotheU.S.inthelatterhalfofthe20thcentury,itisGDPthatcausesforeigndirectinvestment.Theyalsofindevidenceforbi-directionalcausalitybetweenthetwovariablesforothercountries.
Whiletherelationshipbetweeneconomicgrowthandforeigndirectinvestmenthasundergonemuchscrutinyrecently,fordecadesacademicshavebeeninvestigatingeconomicopennessinasimilarcontext.Harrison(1994),foundapositiveconnectionbetweengrowthandopenness,usingavariedassortmentofopennessmeasures,andfindsthatcausalityrunsinbothdirections.Thisisconducivewiththecommoneconomictheorythathighgrowthprovidesanimportantmomentumfortheopeningupofmarketsandfallinggrowthratesfacilitateariseinprotectionism.InconjunctionwithHarrison,Edwards(1997)andSunetal.(2003)bothreportthatopencountriesregularlyhavehighergrowthrates.However,theymakenoclaimconcerningcausalityforthesefactors.
Theassociationbetweenforeigndirectinvestmentandeconomicopennesshasreceivedlittleattentionuntilrecently,butisbecominganincreasinglyimportantissue.ThisisespeciallytrueinthetimesfollowingtherecentfinancialcrisisandthedevelopingtraderelationswithChina,whereregulationsandpoliciesconcerningeconomicopennessareontheforefrontofpoliticalagendas.Twostudies,conductedbyQuazi(2007)andNajarzadehandShahri(2008)bothfindthatindicesofeconomicfreedom,mostnotablytheHeritageFoundation’sEconomicFreedomoftheWorldIndex,areasignificantandrobustdeterminantofforeigndirectinvestment.Similarly,BengoaandSanchez-Robles(2003)determinethateconomicfreedomhasapositivecausationonthelevelofinflowingforeigndirectinvestment.
Thegoalofthispaperistobuildonpreviousliteraturebyenlargingtheinvestigationofeconomicgrowth,foreigndirectinvestmentandeconomicfreedomfrombi-lateraltosimultaneous.Thisisdoneinwiththeambitionofreinforcingordiscountingpaststudiesonthesubject.Todothiswewillusethedataandempiricalmethodsmentionedbelow.
III.Data
ThedatausedinthisstudyisquarterlydatafromtheU.S.during1960Q1to2010Q3andistakenfromtheFederalReserveBankofSt.Louis.Wetakeeconomicgrowthasrealgrossdomesticproduct(RGDP)inbillionsofchained2005dollars.Foreigndirectinvestment(IFDIAV2)isatwoperiodmovingaverageofthenetinflowofforeigndirectinvestmentandisalsoinbillionsofchained2005dollars.Amovingaverageisusedforforeigndirectinvestmentinordersosmoothoutthedata.Economicopenness(EO)isthesumofnetimportsandexportsdividedbytherealgrossdomesticproducttogetaproportionofthepercentageoftradetoGDP.AlldataisseasonallyadjustedandissummarizedinTABLE1.
TABLE1
Variables
Observations
Mean
S.D.
Minimum
Maximum
RGDP
202
744.969
3241.007
2802.616
13363.49
IFDIAV2
202
87.502
132.090
-70.132
729.494
EO
202
0.156
0.0683
0.071
0.292
WethenconductanAugmented-DickeyFullerTesttotestifRGDP,IFDIandEOareallstationaryserieswiththenullhypothesisthatthevariableshaveaunitrootandarestationary.TheresultsaredisplayedinTABLE2.
TABLE2
Variables
ADF-statistic
10%
5%
1%
P-value
Judgment
RGDP
0.883
-2.574
-2.876
-3.463
0.995
AcceptNull
IFDIAV2
-1.230
-2.575
-2.876
-3.464
0.6612
AcceptNull
EO
1.149
-2.574
-2.876
-3.46
0.998
AcceptNull
FromTABLE2wecanconcludethatRGDP,IFDIAV2andEOareallnotstationary.Therefore,weconductthesameAugmented-DickeyFullerTestontheirgrowthrates(firstorderconditions),whichareRGDPGR,IFDIAV2GRandEOGRrespectively.AgraphofthefirstorderconditionscanbeseeninFIGURE2andtheoutcomeoftheADFTestareinTABLE3.
FIGURE2
TABLE3
Variables
ADF-statistic
10%
5%
1%
P-value
Judgment
RGDPGR
-6.797
-2.57
-2.876
-3.463
0.000
RejectNull
IFDIAV2GR
-8.542
-2.575
-2.876
-3.464
0.000
RejectNull
EOGR
-20.301
-2.574
-2.876
-3.463
0.000
RejectNull
WecanseefromFIGURE2andTABLE3thatRGDPGR,IFDIAV2GRandEOGRallhavep-valuesof0.000,meaningthattheyarecanrejectthenullhypothesiswithabsoluteconfidence.Nowthatthevariablesarestationarywecanusetheminourmodels.
IV.EmpiricalMethodology
A.)BestLagOrderSelection
InordertogenerateaVARmodelthatwillprovidereliableresultsweneedtochoosethelagorderthatensuresthattheerrortermsinthemodelwillsatisfythevectorwhitenoiseprocess.Todeterminethelagorderwegiveamaximumlagorderof8(2years)andchoosethelagorderindicatedbythemajorityofcriterions.TheresultscanbeseeninTABLE4.
TABLE4
Lag
LR
FPE
AIC
SC
HQ
0
NA
1.386131
8.840147
8.890863
8.860685
1
95.45931
0.918257
8.428336
8.631197*
8.510488
2
33.90770
0.840099
8.339301
8.69
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