FDI Contribution to GDP in Greece From 1980 to 2010 - Research Paper Example

Institution : xxxxxxxxxxx Course : xxxxxxxxxxx The impact of FDI on the GDP of Greece from the 1980s-2010 Tutor : xxxxxxxxxxx @2013 Table of Contents Table of Contents 2 Abstract 3 1.0 Introduction 3 2.0 Literature Review 4 2.1 FDI on the Economy of Greece 5 2.2 The impact of FDI on the GDP of Greece 6 3.0 Analysis or/and Modelling process 8 4.0 Results and discussion 11 5.0 Conclusion 15 References 16 Abstract The study has evaluated the impact of FDI on the GDP of Greece between the years 1980-2010. The methodology of the study involved the application of Vector Auto Regression and the Granger causality. The study first applied the cointergration analysis which revealed that there is an equilibrium relationship in the long-run. The findings from the Granger causality on the other hand revealed that a bi-directional link between FDI- GDP did not exist. Nevertheless there is a one –way causality that runs from GDP- FDI for a period of 1-2 years. This therefore gives the impression that the entry of foreign capital through FDI has influenced the economic growth of Greece. 1.0 Introduction One of the most significant results attributed to globalization has been the remarkable increase in the global Foreign Direct Investment. Foreign Direct Investment, also known as FDI, can be described as direct investment carried out by an investor in order to secure a long term or a lasting interest in businesses (enterprises) operating outside the economy of an investor. Foreign Direct Investment (FDI) is well acknowledged as one of the most effective global resource flows to any nation. A large number of nations all over the globe are continuously working towards attaining a speedy economic growth; as a result, they are encouraging more and more foreign investors to come invest in their nations. Greece is a country that has endorsed Foreign Direct Investment. This particular paper therefore intends to explore the impact of FDI on the GDP of Greece from the 1980 to 2010. 2.0 Literature Review According to Agrawal and Aamir, (2011) the link between FDI and economic growth has drawn a great deal of attention among scholars and even research studies in the recent years. Agrawal and Aamir, (2011) conducted a study to investigate the impact of FDI on GDP: a comparative Study of China and India. The methodology of the study involved running an Ordinary Least Square (OLS) regression method. Foremost the study involved building a modified growth model that was derived from the basic growth model. The factors that were included in the growth model included, GDP, FDI, Labour Force and the Human capital. GDP was considered as the dependent variable, while the other variable was the independent variables. After conducting regression, the findings of the study revealed that a 1% increase in terms of FDI would lead to a 0.07% growth in GDP of China and an increase of 0.02% in the GDP of India. Agrawal and Aamir, (2011) concluded the study by stating that the findings of the study provide a strong evidence that FDI does promote economic growth, nevertheless it leads to growth only in a scenario whereby the inflows are well managed. Yalta (2012), undertook a study to revisit the FDI-led growth Hypothesis, using the case of China. The methodology of the study involved the application bivariate analysis and multivariate analysis. Simulation based interface was used to evaluate the link between FDI and GDP in China between the year 1982-2008. The findings of the study revealed that FDI does not automatically result to an increase in economic growth at the aggregate level. Yalta (2012), therefore propose that it is necessary to undertake a disaggregated analysis through the use of provincial and industrial level data for the purpose of devising efficient macroeconomic policies that are linked to FDI flows. The limitation of the study was that pre-test biases may have occurred and thus affecting the findings. The World Bank (2003) reveals that FDI can bring about positive spill over to domestic firms, and hence a positive influence of the GDP of a country. The World Bank (2003) further highlights that spillovers from FDI may occur when the existence of a multinational corporation raises the productivity of domestic firms within the host country. This occurs when domestic firms within the host country improve their efficiency by adopting the technology brought by the multinational corporations and also by hiring employees that are trained by the MNEs. In addition domestic firms may also be more productive due to obtaining less costly and improved inputs that are the MNEs produce. World Bank (2003) further reveals that another spillover may take place if the entry of the multinational company results to intense competition within the market in the host country; consequently the local firms are forced to utilize the existing technology more effectively or even explore avenues of production and thus enhancing the GDP of the country. 2.1 FDI on the Economy of Greece According to Monastririotis and Jordaan (2011) Greece has historically not been a significant recipient of FDI. Consequently since the 1950s the country embarked on developing various policies that would encourage FDI. Although Greece ranks persistently at the bottom of the international rankings of FDI, the OECD Reviews (1994) highlight that Greece has over the years been positioning herself as an attractive prospect for FDI. According to OECD Reviews (1994) the steady increase in the GDP of the country has been influenced by reforms to encourage FDI. For instance in order to encourage investment priority, the government has been providing various targeted investment incentives. The incentives have mostly been in terms of tax allowances and benefits which include subsidies on interest rates and accelerated depreciation. Efforts have also been made to provide grants to foreign investors. OECD Reviews (1994) highlight that the incentives are usually offered without the application of discriminatory tendencies. Although the incentives may be costly, the government has over the years acknowledged the fact that that the incentive policy is useful in attracting foreign direct investment which assists in raising the GDP (OECD Reviews, 1994). 2.2 The impact of FDI on the GDP of Greece Andreas (2011) undertook a study to examine the casual relationship that exists between economic development as measured by GDP per capita and Foreign Direct Investment for member countries within the European Union. According to Andreas (2011) FDI has had an impact on the Gross Domestic Product (GDP) of Greece. Andreas (2011) reveals that during the 1980, the GDP of Greece increased from 1,437 U.S Dollars in the 1970 to 5,673 US Dollars in the 1980. The early years of the 1980s were characterized by a downward trend in terms of GDP until 1985 when a slight growth was recorded. Nevertheless since 1986, a relatively stable upward trend was recorded as indicated by the Figure 1 below Andreas (2011) further reveals that since 1990 a relatively stable increase has been recorded in the GDP of Greece until a minimum decline slight adjustment was recorded in 2001. After the year 2001 a steady increase in GDP has been recorder until 2005 as indicated by Figure one above. A study conducted by Index Mundi (2012) on the GDP of Greece between the years 2005 to 2010 reveals that there was a steady increase in the GDP of the country, with the highest percentage being 1.73 percent in 2007. Marginean (2011) in a study to investigate globalization and economic crisis in European countries reveals the pattern of GDP in Greece is basically a relevant indicator of the impact of the economic crisis. This is because in despite of the existence of FDI initiatives there a drastic decrease in terms of GDP. 3.0 Analysis or/and Modelling process This particular project will utilize data that contains the yearly observations between the years 1980-2010. All the data to be used will be acquired for World Bank database (WDI). The data will then be converted into logarithmic returns for the purpose attaining mean reverting relationship and also to ascertain the validity of procedures of econometric testing. Descriptive Statistics Foreign Direct Investment can be described as the net investment inflows to gain a lasting interest in management, in a firm conducting operations in another economy which is not that of the investment. It can also be described as the sum of reinvestment earnings, short term and long-term capital and equity as indicated by the balance of payment. GDP (Gross Domestic Product) is the total of gross value that is supplemented by all existing producer within an economy, plus any exist taxes on products minus any subsidies that is not contained in the value of the products. GDP is usually calculated minus including degradation of natural resources, depletion and the depreciation of fabricate assets. Step I Augmented Dickery Foremost the econometric methodology will evaluate stationary properties that exist within the univariate time series. In order to examine the unit roots of the identified time variables the Augmented Dickey-Filler (ADF), will be used. It involves the running of a regression on the initial series difference against the following The series lagged once The lagged difference terms , Employing a constant Employing a time trend , as highlighted below : 𝛥Yt = α1 Yit-1+ Σβij𝛥Y it-j + Xit δ + εt, Summing from j=1 to pi As expressed above, the investigation of a unit root is performed on the ( Yt-1)coefficient , in the regression. In case the coefficient varies from zero, then it can be stated that the hypothesis; (y) consists a unit root is rejected. Consequently, if the null hypothesis is rejected then stationarity occurs. Step 2 Cointegration analysis The time series in this case 1980-2010 has to be subjected to Cointergration. Cointergration analysis assists in the finding the economic relationships that exist between two or more variables in the long-run. The analysis is also useful in preventing the spurious regression risk. In addition, Cointergration analysis can be described as significant based on the fact that if variables that are non-stationary are cointegrated, then the VAR model Vector Autoregression in the initial difference is mispecified as a result of a common trend (Johansen & Juselius, 1990). In a scenario whereby the cointergration relationship is identified, then the model is to consist of residual from the vectors through a system of Vector Error correction Mechanism (VECM). According to Johansen (1988) the Cointegration test is utilized to detect a cointergration relationship between the variables. Through the application of Jahansen multivariate cointergration framework, the equation below can be derived: 𝛥 Zt = T1 𝛥 Zt-1 +…+T K-1 𝛥 Zt-K-1 Π Zt-1 + μ + εt,: t = 1,…, T In this case 𝛥 is basically the initial difference operator, Z’ which symbolizes a vector of variables, εt   n iid (0, δ2 ), μ can be described as a drift parameter, in addition Π = αβ’, whereby both α and β (p x r) are matrices of full rank, with β consisting the cointergration relationship of while a holds the corresponding adjustment coefficient in all of the r vectors. Step 3 Granger Causality The Granger’s causality is structured in terms of the aspect of predictability (Granger, 1969). Consequently in order to apply the Granger test, a certain autoregressive lag length indicated by k (or p) is assumed as the following equations are estimated: Xt = λ1 +Σ α1i X t-i (Summing from K to i=1) + Σ bIj Yt-j + μ1t (Summing from K to j=1) Yt = λ2 + Σ α2i X t-I (Summing from p to i=1) + Σ b2j Yt-j + μ2t (Summing from Pto j=1) Step 4 An F-test is then undertaken on the null hypothesis of the Granger causality as indicated: Ho : bi1 = bi2= ……= bi k = 0, i+ 1,2. Ho: bi1 = bi2= bi k= 0, i+ 1,2, In this case F statistics can be described as the Wald statistics of the null hypothesis. In case the F statistic will be larger than particular critical value within the F distribution, consequently the null hypothesis will be rejected implying that Y doesn’t cause Granger x which also implies that Y Granger causes X. 4.0 Results and discussion On the basis of the descriptive statistics which was based on investigating the two variables; FDI and GDP, the findings indicate that the two variables were not normally distributed. This is because there existed Skewness and leptokurticty. As indicated by Table 1 below: GDP FDI Mean 3.884557 8.704907 Median 3.922462 8.811030 Maximum 4.491337 9.728750 Minimum 3.157563 7.380211 Standard Deviation 0.349487 0.580046 Kurtosis 2.353133 2.490166 Skewness -0.308467 -0.6833098 Jarque- Bera 0.987118 3.284203 Probability 0.610450 0.303497 The findings of the Augmented Dickery are indicated in the table 2 below Test With Intercept Test with Trend and Intercept Test without Trend and Intercept Levels Ist Difference Levels Ist Difference Levels Ist Difference FDI -3.0747 -5.6595 -3.2104 -5.5907 1.5771 -5.2709 GDP -0.8376 -4.7359 -3.8841 -4.4711 -2. 2429 -2.9415 C.V -3.6104 -3.6267 -4.4212 -4.2350 -2.6308 -2.4487 The critical value was 1% significant level The findings of the cointergration were as follows: Null Hypothesis Trace statistics 1% Critical value Maximum Eigenvalue Statistic 1% Critical value r* = 0 20.2236 19.9371 19.0406 18.5290 r = ≤ 2.1830 6.6349 2.1830 6.6349 r* represents the amount of cointergration vectors subjected to null hypothesis Findings of the Granger Causality were as follows: F statistics Null Hypothesis Lag 1 Lag 2 Lag 3 Lag 4 FDI does not influence Granger –cause GDP per capita 1.4065 0.9678 0.5938 0.3936 GDP per capita does not influence Granger to cause FDI 15.27158*** 8.5963*** 1.7458 1.1125 From the above results, it can be stated that when the Augmented Dickery – fuller test got applied, the test results showed that both variables FDI and GDP are stationary at the first difference at a 1% significance level. After these cointergration was then applied on the null hypothesis of no cointergration at a significance level of 1%. The findings of the trace tests and those of the eigenvalue did not discard the null hypothesis. The cointergration analysis revealed that there is the existence of an equilibrium relationship in the long-run. On the other hand, the findings from the Granger causality revealed that a bi-directional link between FDI- GDP did not exist. Nevertheless there is a one –way causality that runs from GDP- FDI for a period of 1-2 years. This therefore gives the impression that the entry of foreign capital through FDI of Granger influences economic growth in Greece. These particular study therefore reveals that the results are in line with the majority of the studies conducted on FDI and also other studies that have been conducted on Greece, for instance by Petroulas, 2008, Hansen and Rand ,2006 and Alexious and Tsaliki, 2007. The main finding of this particular study is that there is a relationship between FDI and GDP for Greece between the years 1980-2010. In general FDI has a positive influence of the GDP of Greece. As indicated by the findings of the Granger causality there was a strong indication of economic growth as measured by Gross Domestic Product. The finding of this particular study validates the fact that Foreign Direct Investment is a significant aspect in influencing the growth of any particular economy. Greece in this context is a country that has adopted policy measures that can facilitate the growth of FDI. As a result as indicated by the study the existence of FDI in the country has influenced economic growth as measured by GDP. Although Greece was greatly affected by the financial crisis in 2008-2010 to date, what is evident is that if the country continues to attract foreign investment then the country has a probability of reforming its economy in the long-run. 5.0 Conclusion The study has evaluated the impact of FDI on the GDP of Greece between the years 1980-2010. The paper takes note of the fact that (FDI) is well acknowledged as one of the most effective global resource flows to any nation. Consequently many nations and even Greece has been working town enhancing FDI. From the analysis of literature a basic finding in most of the studies undertaken is that FDI has the probability of bringing positive influence to the GDP of an economy. This hypothesis was also proven in Greece between the years 1980-2010. In conclusion, the study proposes that in order for Greece to deal with the impending challenge of the Euro crisis, the country should attract more FDI, which be useful in bringing economic reforms. References Andreas, G, 2011, The Casual Links between FDI and Economic Development : Evidence from Greece, European Journal of Social Sciences,27(1), pp12-20. Alexious ,C and Tsaliki, P,2007, Foreign Direct Investment-led Growth Hypothesis , Evident from Greek Economy, Zagreb International Review of Economics & Business , 10, 85-97. Agrawal, G and Aamir, K,2011, The Impact of FDI on GDP: A comparative Study of China and India, International Journal of Business and Management , 6(10), p73 Granger , C,1969, Investigating casual relationship by econometric models and cross spectral methods , Econometrica, 37, p424-458. Hansen , H and Rand, J, 2006, On the casual links between FDI and growth ‘’ The world Economy , 29(1), 21-41. Index Mundi , 2012, Greece - foreign direct investment Foreign direct investment, net outflows (% of GDP). Javorcik, B, 2004, .Does Foreign Direct Investment Increase the productivity of Domestic Firms, The American Economic Review,94(3) Johansen, S and Juselius, K, 1990, Maximim Likelihood estimation and inference on cointergration will applications fro the demand for money , Oxford bulletin of Economics and Statistics, 52, p169-201. Johansen, S, 1988, Statistical analysis of cointergration vectors, Journal of Economic Dynamics and control, 12, p231-254. Marginean, S,2011, Globalization and Economic Crisis in European countries, International Journal of Economics and Finance Studies,3(1),p215. Monastririotis,V and Jordaan, J , 2011, Regional Distribution and Spatial Impact of FDI in Greece , Evident from firm level data, The European Institute . OECD Reviews,1994, OECD Reviews of Foreign Direct Investment a Case of Greece , OECD. Petroulas, P, 2008, ‘’ Foreing Direct investment in Greece, Productivity and spillover effects , Economic Bulletin, 31,p31-48. World Bank, 2003, Developing Knowledge Intensive sectors , Technology Transfers , and the Role of FDI, FDI Advisory Service . Yalta, Y, 2012, Revisiting the FDI-led growth Hypothesis: The case of China Original , Economic Modelling, 31(13), Pg335-343 Read More