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The relationship between foreign direct investment and economic growth in Romania

Academy of Economic Studies Doctoral School of Finance and Banking. The relationship between foreign direct investment and economic growth in Romania. MSc Student: Stoian Adrian Supervisor: Professor Mois ă Altăr. Bucharest, July 2008. Contents. Introduction The goal of this paper

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The relationship between foreign direct investment and economic growth in Romania

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  1. Academy of Economic Studies Doctoral School of Finance and Banking The relationship between foreign direct investment and economic growth in Romania MSc Student: Stoian Adrian Supervisor: Professor Moisă Altăr Bucharest, July 2008

  2. Contents • Introduction • The goal of this paper • Literature review • Methodology • The data • Results • Conclusions

  3. 1. Introduction 1.1 The effect of FDI on growth almost generally accepted as a positive one Studies: Alfaro et. al (2004); Basu et. al (2003); Fedderke and Romm (2006). 1.2 Some controversy brought forth by other studies: Gorg and Greenway (2004); Atiken and Harrison (1999).

  4. 2. The goal of this paper • To determine whether the is a cointegrating relationship between FDI and economic growth in the Romanian economy • To determine the type of this relation (in case it exists) • What is the direction of causality between the two variables

  5. 3. Literature review (I) • Cross-country studies: Blomstrom (1994); Borensztein (1998); • Panel studies: Carkovic and Levine (2005); Nair-Reichert and Weinhold (2001); • Panel cointegration studies: Basu (2003); • Time series studies for individual countries: Ramirez (2000); Cuadros (2004); Fedderke and Romm (2006).

  6. 3. Literature review (II) • Problems associated with these types of studies: • Cross-country studies: the assumption of identical production functions across countries; • Panel studies: the imposition of homogeneity on the coefficients of the lagged dependent variables; • Panel cointegration studies: still the heterogeneity problem; • Time series studies for individual countries: the use of only one cointegration test

  7. 4. Methodology • Cointegration analysis: • The Engle-Granger procedure • The ECM test • The Johansen method • The Gregory-Hansen procedure • The Phillips-Loretan model • Granger causality test.

  8. 5. Data (1) Variables considered: • The logarithm of the real gross domestic product: LogGDP • The foreign direct investment to GDP ration: FDI/GDP

  9. 5. Data (2) The gross domestic product The FDI/GDP ratio

  10. 5. Data (3)

  11. 5. Results (1) The Engle Granger procedure: The ADF test for the residuals based on:

  12. 5. Results (2)

  13. 5. Results (3) The ECM test for cointegration The null of no cointegration is b3=0

  14. 5. Results (4)

  15. 5. Results (5) The Johansen test

  16. 5. Results (6) • The Gregory-Hansen procedure • Based on the use of three single equation models • Model 1: The level shift model (C): • Model 2: The slope change model (C/T):

  17. 4. Results (7) Model 3: The regime shift model (C/S) where and The decision of the Gregory-Hansen procedure

  18. 5. Results (8) The values of the ADF test for Model C

  19. 5. Results (9) The values of the ADF test for Model 2

  20. 5. Results (10) Estimating the type of long-run relationship The Phillips-Loretan single equation ECM

  21. 5. Results (11) The first Phillips Loretan equation whereand

  22. 5. Results (12)

  23. 5. Results (13) The second Phillips Loretan equation whereand

  24. 5. Results (14)

  25. 5. Results (15) Causality testing where

  26. 5. Results (16)

  27. 6. Conclusions • The relationship between FDI and economic growth • The two variables considered in the analysis are cointegrated • The relationship between the two variables is a positive one • Causality runs from FDI to economic growth • Suggestions for future studies: • Periodically redo the time series analysis to determine whether the small share of FDI in the first part of the analyzed period is the cause for not finding an impact of FDI on growth • Identify what types of FDI promote growth

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