Bounds testing approach: an examination of foreign direct investment, trade, and growth relationships

Frimpong, Joseph Magnus and Oteng-Abayie, Eric Fosu (2006): Bounds testing approach: an examination of foreign direct investment, trade, and growth relationships. Forthcoming in: American Journal of Applied Sciences

Abstract

Purpose: This paper examines the long-run impact of foreign direct investment and trade on economic growth in Ghana. Methodology: Using an augmented aggregate production function (APF) growth model, we apply the bounds testing (ARDL) approach to cointegration which is more appropriate for estimation in small sample studies. The data span for the study is from 1970 to 2002. Findings: The results indicated the impact of FDI on growth to be negative which is consistent with other past studies. Trade however was found to have significant impact on growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: Ghana; ARDL cointegration; unit roots; equilibrium-correction; FDI; Trade
• Subjects: F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; F - International Economics > F3 - International Finance > F39 - Other

References

Aryeetey, E. (2005), Globalization, Employment and Poverty in Ghana, WIDER Thinking Ahead: The Future of Development Economics, Marina Congress Center, Helsinki, 17-18 June 2005.

Aryeetey, E. and Harrigan J., (2000). “Macroeconomic and Sectoral Developments since 1970” in Economic Reforms in Ghana, The Miracle and The Mirage, edited by E. Aryeetey, J. Harrigan and M. Nissanke, James Currey and Woeli Publishers, Oxford, 2000

Aryeetey, E. and Fosu, A.K, (2005). “Economic Growth in Ghana: 1960-2000” AERC Growth Project Workshop, Cambridge, March 2005.

Asiedu, E., (2002), “On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different?” World Development, 30 (1) 107-119.

Bhagwati J.N. (1985). Investing Abroad; Esmee Fairbain Lecture, Lancaster University. Reprinted in V.N. Balasubramanyam (ed) J N Bhagwati, Writings on International Economics ( 1997, Delhi, Oxford University Press)

Bhagwati, J. N. (1978). “Anatomy and Consequences of Exchange Control Regimes”, Vol. 1, Studies in International Economic Relations, 10 (New York: National Bureau of Economic Research).

Borensztein, E., J.D. Gregorio, and J.W. Lee, (1998). ‘How does foreign direct investment affect economic growth?’, Journal of International Economics, 45:115-35.

Choong, C.K., Zulkornain Y., Venus Liew K.S. (2005). “Export-led Growth Hypothesis in Malaysia: An Investigation Using Bounds Test”, Sunway Academic Journal, 2, 13-22.

Elliot, G., Rothenberg, T.J., Stock, J.H., (1996). “Efficient Tests for an Autoregressive Unit Root”. Econometrica, 64, 813-36.

Ng, S., Perron, P., (2001). Lag Length Selection and the Construction of Unit Root Test with Good Size and Power. Econometrica, 69, 1519-54.

Feder, Gershon, (1983), On Exports and Economic Growth. Journal of Development Economics, 12: 59-73.

Fosu, A. K. (1990), Export Composition and the Impact of Exports on Economic Growth of Developing Economies. Economic Letters, 34: 67-71.

Frankel, J.A.and D. Romer (1999), “Does trade cause growth?” American Economic Review 89: 379-99.

Frimpong, J. M., Oteng-Abayie, E. F., (2006). “Bivariate Causality Analysis between FDI Inflows and Economic Growth in Ghana”. Proceedings, 3rd African Finance Journal Conference, “Research in Development Finance for Africa”, 12th – 13th July, 2006, Ghana.

Herzer, D., Nowak-Lehmann D., F., Siliverstovs, B., (2006), Export-led growth in Chile: Assessing the role of export composition in productivity growth. The Developing Economies 44 (3), forthcoming.

Johansen, S., Juselius, K., (1990). Maximum Likeliwood Estimation and Inference on Cointegration-With Application to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52, 169-210.

Karbasi, A., E. Mahamadi, S. Ghofrani, (2005). “Impact of Foreign Direct Investment on Economic Growth.” Paper presented at the 12th Economic Research Forum Conference, 19th–21st December, 2005, Egypt.

Kohpaiboon, A. (2004). "Foreign Trade Regime and FDI-Growth Nexus: A Case Study of Thailand", Working paper, Australian NationalUniversity.

Lipsey, R.E. (2000). "Inward FDI and Economic Growth in Developing Countries", Transnational Corporations, 9(1), 61-95.

Lipsey, R.E. (2001). "Foreign Direct Investment and the Operations of Multinational Firms: Concepts, History and Data", NBER Working Paper N° 8665, Cambridge, MA; National Bureau of Economic Research (NBER).

Levin, A., Lin, C. F., and C. Chu (2002). “Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties,” Journal of Econometrics, 108, 1–24.

Mansouri B., (2005), “The Interactive Impact of FDI and Trade Openness On Economic Growth: Evidence from Morocco.” , Paper presented at the 12th Economic Research Forum (ERF) Conference, Cairo. December, 2005

Pahlavani, M., Wilson E., Worthington A.C., (2005). “Trade-GDP Nexus in Iran: An Application of Autoregressive Distributed Lag (ARDL) Model.” American Journal of Applied Sciences 2(7): 1158-1165.

Pesaran M.H, Pesaran B. (1997). Working with Microfit 4.0: Interactive Econometric Analysis. Oxford, Oxford University Press.

Pesaran, M.H., Shin, Y., Smith, R.J., (2001). Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics, 16, 289-326.

Ouattara, B., (2004). “Foreign Aid and Fiscal Policy in Senegal.” Mimeo University of Manchester.

Sachs, J., Werner A., (1995). “Economic Reform and the Process of Global Integration.” Brookings Papers on Economic Activity 1, 1-118.

Shrestha M.B, Chowdhury K. (2005). “ARDL Modelling Approach to Testing the Financial Liberalisation Hypothesis”. Economics Working Paper Series 2005, University of Wollongong.

Ukpolo, Victor. (1994), Export Composition and Growth of Selected Low-Income African Countries: Evidence from time-series data. Applied Economics 26:445-449.

Wacziarg, R., 2001. Measuring the dynamic gains from trade. World Bank Economic Review 15, 393–429.

Xu, B., 2000. ‘Multinational enterprises, technology diffusion, and host country productivity growth’, Journal of Development Economics, 62: 477-93.