[IMPACTS OF FDI FOR ECONOMIC GROWTH]

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Acknowledgement

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible (Aitken, 1999,, 605).

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University (Aitken, 1999,, 605).

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The Impacts of FDI for Economic Growth

The analysis starts by estimating a number of base equations, i.e. the Z variables are not yet included in the regression models. The results of these estimations are presented in table 3 (without LINVGDP) and table 4 (with LINVGDP). Column [1] in both tables shows the relevance of including the different I variables as determinants of GDP per capita growth. The tables show that LGDPPC, LSECENR, LCREDP and LINVGDP have a significant impact on economic growth. In column [2] LFDI is added to this equation. This variable does not have a significantly positive direct effect on economic growth. This may be interpreted as a confirmation of the view that without additional requirements FDI does not enhance economic growth of a country.

As explained above, the aim of this paper is to empirically investigate the hypothesis that FDI and domestic financial markets are complementary with respect to enhancing the process of technological diffusion, thereby increasing the rate of economic growth. Therefore, the empirical analysis focuses on the variables LFDI and the interactive term LFDI*LCREDP, which represent the vector of M variables as specified in equation (1). The model presented in column [3] of tables 3 and 4 directly tests the central hypothesis of this paper. The outcomes in the tables show that the interactive term LFDI*LCRED is positive and significantly related to the dependent variable PCGROWTH, whereas LFDI alone is significantly negative.8 This supports the view that FDI only has a positive effect on economic growth if the development of the domestic financial system has reached a certain minimum level. Thus, we find preliminary support for the central hypothesis of this paper.

It may be argued that the results presented in column [3] of tables 3 and 4 are due to high multi-collinearity between LSECENR and LCREDP (see table 2). This would mean that the results found are in fact due to the level of human development in a country (i.e. the hypothesis forwarded by Borensztein et al., [1998])9, rather than due to the level of financial development. To further investigate this issue we estimate a model incorporating LFDI, LFDI*LCREDP, and LFDI*LSECENR. This model is presented in column [4] of both tables. If we concentrate on the results for the model including LINVGDP (table 4), the results of the estimation show that LFDI*LCREDP remains significant; however, LFDI*LSECENR becomes insignificant.

These results can be interpreted as follows. First, it again confirms the hypothesis that a certain level of financial market development ...