Exploring the Causality and Co-integration Relationship between FDI, GDP and Employment: A Case of Czech Republic

Yousafzai, Arshad Hayat (2014): Exploring the Causality and Co-integration Relationship between FDI, GDP and Employment: A Case of Czech Republic.

Abstract

The paper investigate long term relationship between FDI, GDP and host country employment by using sector-wise panel data from 1993-2011 for the Czech Republic. IPS test is applied for panel data unit root testing and Johansen Fisher Panel Co-integration test is used to test for the presence of co-integration relationship between the variables. A vector error correction model (VECM) is estimated to find out the short run and long run causality between the variables. In the end, Impulse response functions are estimated. The paper found both a short term and long term causality going from FDI inflow to employment. Impulse responses show that both GDP and employment respond positively to an exogenous shock in FDI inflow. However, the employment response to FDI inflow shock is smaller than that of GDP response.

• Item Type: MPRA Paper
• Language: English
• Keywords: Foreign Direct Investment (FDI), Employment, Czech Republic, Unit Root, Co-integration, Causality
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms ; International Business; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J23 - Labor Demand

References

1. Agrawal, G. and Khan, M. A. (2011), “Impact of FDI on GDP: A Comparative Study of China and India”, International Journal of Business and Management, Volume 6, Number 10

2. Ahmed, E. M. (2012), “Are the FDI Inflow Spillover Effects on Malaysia's economic growth input driven?” Economic Modeling 29, 1498-1504

3. Aizenman. J, (2003), “Volatility, Employment and the Patterns of FDI in Emerging Markets”, Journal of Development Economics 72, 585– 601

4. Ajaga, E. and Nunnenkamp, P. (2008), “Inward FDI, Value Added and Employment in US States: A Panel Co-integration Approach”, Kiel Working Paper No 1420

5. Alfaro. L, Chanda. Areendam, Ozcan. K. S and Sayek. S (2010), “Does Foreign Direct Investment Promote Growth? Exploring the Role of Financial Markets on Linkages”, Journal of Development Economics 91, 242–256

6. Ayumu. T (2012), “The Effects of FDI on Domestic Employment and Workforce Composition”, RIETI Discussion Paper Series 12-E-069

7. Baldwin, R. E. (1994), “The Effects of Trade and Foreign Direct Investment on Employment and Relative Wages”, OECD Economics Studies No. 23

8. Blalock, G. and Garter, P.J. (2005), “Welfare Gains from Foreign Direct Investment through Technology Transfer to Local Suppliers”, Journal of International Economics, Volume No. 74, 402-421

9. Blomstrom. M, Fors. G and Lipsey. R.E (1997), “Foreign Direct Investment and Employment: Home Country Experience in the United States and Sweden” NBER Working Paper No. 6205

10. Borensztein. E, Gregorio. J. D and Lee. J.W (1998), “How Does Foreign Direct Investment Affect Economic Growth?” Journal of International Economics 45, 115–135

11. Bruno, G.S.F. Crino, R. and Falzoni, A.M. (2012), “Foreign Direct Investment, Trade and Skilled Labor Demand in Eastern Europe”, Review of Labor Economics and Industrial Relations, Volume No. 36, 495-513

12. De Mello, L.R. (1999), “Foreign Direct Investment-led Growth: Evidence from Time Series and Panel Data”, Oxford Economic Papers. No. 51 (1): 133-151

13. Dinga, M. and Munich, D. (2008), “The Impact of Territorially Concentrated FDI on Local Labor Markets: Evidence from the Czech Republic”, Labor Economics, Volume Number. 17 354–367

14. Eckel, C. (2003), “Fragmentation, Efficiency-Seeking FDI and Employment”, Review of International Economics, Volume No. 11, 317-331

15. Gorodnichenko,Y. Svejnar, J. and Terrell, K. (2007), “When Does FDI Have Positive Spillovers? Evidence from 17 Emerging Market Economies”, IZA DP No. 3079

16. Hansen. H and Rand. J (2006), “On the Causal Links between FDI and Growth in developing Countries” The World Economy, Volume 29, Issue 1, pp. 21-41

17. Herzer. D, Klasen. S and Lehmann. D. F. N (2008), “In Search of FDI-led Growth in Developing Countries: The Way Forward” Economic Modelling 25 (2008) 793–810

18. Horvat, T. and Irsova, Z. (2011), “Estimating Vertical Spillovers from FDI: Why Results Vary and What the True Effect Is?”, Journal of International Economics, Volume No. 85(2), 234-244

19. Horvat, T. and Irsova, Z. (2013), “Determinants of Horizontal Spillovers from FDI: Evidence from a Large Meta-Analysis”, World Development, Volume No 42, 1-15

20. Hsiao, F.S.T, Hsiao. M.C.W (2006), “FDI, Exports, and GDP in East and Southeast Asia—Panel Data Versus Time-series Causality Analyses”, Journal of Asian Economics 17 (2006) 1082–1106

21. Hunya, G. and Geishecker, I. (2005), “Employment Effects of Foreign Direct Investment in Central and Eastern Europe”, The Vienna Institute for International Economic Studies, Research Report 321

22. Javorcik, B.S. and Spatareanu, M. (2011), “Does it Matter Where You Come From? Vertical Spillovers from Foreign Direct Investment and the Origin of Investors”, Journal of Development Economics, Volume No. 96, 126-138

23. Jay, S. M (2010), “Foreign Direct Investment Inflows and Economic Growth of China”, Journal of Policy Modeling 32, 155–158

24. Jayaraman, T.K. and Baljeet, S. (2007), “FDI and Employment Creation in Pacific Island Countries: An Empirical Study of Fiji”, Asia-Pacific Research and Training Network on Trade Working Paper Series No. 35

25. Jenkins, R. (2006), “Globalization, FDI and employment in Viet Nam”, Transnational Corporations Journal, Volume No. 15(1), 115-142

26. Keller. W and Yeaple. R. S (2009), “Multinational Enterprises, International Trade, and Productivity Growth: Firm-Level Evidence from the United States”, The Review of Economics and Statistics, Vol. 91(4), pp. 821-831

27. Krizek. M, (2010), “How the Czech Republic is Attracting Overseas Investors”, Performance, Volume 4, Issue 3

28. Kyung, S.I, Pesaran, M.H. and Shin, Y. (2003), “Testing for Unit Roots in Heterogeneous Panels”, Journal of Econometrics, 115, 73-54

29. Masron. T.A, Zulkafli. A.H and Ibrahim. H (2012), “Spillover Effects of FDI within Manufacturing Sector in Malaysia” Procedia Social and Behavioral Sciences 58, 1204 – 1211

30. Mickiewicz, T., Radosevic, S., Varblane, U (2000) “The Value of Diversity: Foreign Direct Investment and Employment in Central Europe during Economic Recovery”, Economic and Social Research Council Working Paper 05

31. Olusanya, Samuel. Olumuyiwa (2013), “Impact of foreign Direct Investment Inflow on Economic Growth in a Pre and Post Deregulated Nigeria. A Granger Causality Test 1970-2010”, European Scientific Journal Vol.9, No.25

32. Palat, M. (2011), “The Impact of FDI on Employment in Japan”, Acta Universtatis Agriculturae ET Silviculturae Mendelianae Brunesis, Volume 27, pp. 261-266

33. Pardeep, K. (2011), “Impact of FDI on GDP-A Critical Evaluation”, VSRD International Journal of Business and Management and Research, Volume 1(2), pp. 103-114