The Causal Relationship of Continent Wise FDI Inflows,

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1 J. Basc. Appl. Sc. Res., 2(10) , , TextRoad Publcaton ISSN Journal of Basc and Appled Scentfc Research The Causal Relatonshp of Contnent Wse FDI Inflows, Behrooz Shahmorad 1 Masoud Kherandsh 2 1 Assstant Professor, Department of Management, Scences and Research Branch, Islamc Azad Unversty, Kurdstan, Iran 2 Assstant Professor, Department of Economcs,Faculty of Humantes, Gonbad Kavous Unversty, Shahd Fallahy Street, Gonbad, Iran ABSTRACT Snce 1990s, a lot of countres n the world have wtnessed sustanable growth n ther economes, and even faster growth n ther nternatonal transactons, especally n the form of FDI. The share of FDI n world GDP has grown fve tmes through durng 1980s to 1990s, whch maes FDI a subject of ever growng nterest. The current study attempts to mae a contrbuton n ths context, by analyzng the exstence and nature of causaltes, f any between dfferent classfcatons of FDI nflows n the world. For ths reason Granger causalty test was used. The results for the dfferent regons of the world clearly complement the Granger causalty test results for world, developed and developng. Where both developed regons and world causes developng regon FDI nflows but developng does not causes nether world nor developed. Both Afrca and Asa share bcausal relatonshps among themselves and wth world and Amerca. Furthermore, Europe causes both Asa and Afrca. KEYWORDS: Bdrectonal and Undrectonal relatonshp, Contnent wse, FDI, Granger causalty, Statonary. INTRODUCTION After 1980, the restrctons on FDI (Foregn Drect Investment) over the world were dramatcally reduced. Ths was due to host of factors le globalzaton polces of developng countres, acceleratng technologcal change, emergng worldwde ntegrated producton and maretng networs, exstng blateral nvestment treates, prescrptons from multlateral development bans, and postve evdence from developng countres that have opened ther economes to FDI. Moreover, the dryng-up of commercal ban lendng because of debt crses whch brought many developng countres to reform ther nvestment polces n order to attract foregn nvestment; n ths case FDI emerged to be an attractve alternatve to bans as a source of captal nflows. In the process, ncentves and subsdes were offered, partcularly to transnatonal companes that supported developng countres ndustral polces. All these led to a rapd expanson of FDI flows around the world durng the last 30 years from only $51.5 bllon n 1980, FDI outflows reached $1.2 trllon n 2000 and $1.7 trllon n 2008[1]. Many emprcal studes have focused upon the causalty of FDI, from dfferent pont of vews. Sgnfcant relatonshps have been found between FDI and technologcal ntensty[2], frm sze[3], captal ntensty[4] and product dfferentaton[5] and other related varables. These studes though provde ratonale and a generalzed method for explanng varatons n FDI, however, do not focus on regonal varatons. It s ths aspect that has been explored n the present study; Therefore, objectves of the present study are to: Analyze causal relatonshp among world FDI nflows and FDI nflows of dfferent regons. Analyze causal relatonshp among FDI nflows of dfferent regons. There are certan factors whch causes change and nfluence the trends of FDI nflows. The most mportant ones are: Locaton as a regon Dunnng s [6,7] eclectc paradgm posts genercally that an MNC nvests n the most advantageous locaton. Ths lnage s dyadc, between each MNC and ts unque locaton decson wthn a country. However, f we consder locaton decsons of varous MNCs collectvely, n the context of the bandwagon effects, then locaton can have a wder, regonal connotaton. MNCs often evaluate prospectve FDI destnatons on a regonal, rather than sngle-country bass. Geographcally contguous countres are lely to have smlar cultures, poltcal and economc systems, and development levels. Such countres often consttute a regonal economc groupng, wth consderable unformty n ther trade and nvestment polces. Numerous benefts accrue to MNCs from operatng n such unfed marets, wth common communcaton nfrastructure, ntra- regonal trade wthout barrers, and networng *Correspondng Author: Behrooz Shahmorad, Assstant Professor, Department of Management, Scences and Research Branch, Islamc Azad Unversty, Kurdstan, Iran. Emal: bsheco@yahoo.com 9886

2 Shahmorad and Kherandsh, 2012 opportuntes. FDI nto Western Europe (EU), East Asa (ASEAN), South Asa (SAARC), Eastern Europe, Latn Amerca (e.g., MERCOSUR) and Afrca (PTA), etc. has followed the same regonal pattern n explotng the advantages of economc ntegraton outlned above and captalzng on an nternatonal dvson of labor [8]. Therefore, MNC nvestments ntally flow to the regon that provdes the best mx of the tradtonal FDI determnants. Ths bacground provdes an mpetus to the world FDI nflows and regon wse analyss of world FDI nflows, the core concept of the present study. Cost-reducton pressures Reducng cost can buld-up ntense compettve pressures n the orgnal host regon whch would lead MNCs to mae effcency-seeng nvestments n low-wage countres to reduce costs. Lberalzed nvestment envronment The mpudent economc polces of most developng countres n Asa, Latn Amerca and Afrca up to the early 1980s were bascally caused by ther socalst leanngs. Ths, together wth the greater benefts of nvestng n Western Europe, prevented any sgnfcant FDI nto above regons. However, the subsequent falure of planned economes caused wde spread dsenchantment wth restrctve polces and other dsadvantages of closed economy gradually encouraged these governments to start openng up ther economes [9]. Furthermore, MNCs nvestments nto a regon wll be contngent upon the countres n that regon adoptng nvestor-frendly lberalzaton polces. Insttutonal prerequstes for attractng FDI The functon of governments n provdng a favourable envronment to FDI cannot be over-emphaszed. Foremost, they need to establsh prerequstes such as a stable poltcal and economc envronment, the rule of law, and better nfrastructure. Educated and techncally slled wor forces, low wages, open economy and stable currency are also essental [9]. However, t needs to be mentoned that the optmal mx of FDI determnants for lowwage countres would be dfferent from the mx for the developed countres. Cultural proxmty Many prevous studes have found that cultural proxmty play a crucal role for to the home country to attract more FDI [10, 8]. However, some other studes have clamed that the preferences and tastes of consumers n dfferent natons are convergng to a global norm [11], and hence the effect of cultural dstance s lely to be weaer progressvely. Moreover, MNCs mght also be forced to gnore the greater cultural dstance of developng countres n favor of ther low-wage advantages. SCOPE AND METHODOLOGY The data covers world and regon wse FDI nflows for the perod Data are secondary whch have been collected form IMF and UNCTAD. The econometrc technque employed for emprcal analyss ncludes ADF test and Granger causalty test whch are explaned n detal n the later stage of the artcle. For the sae of emprcal analyss the data on world FDI nflows was classfed nto developed and developng at frst nstance and contnent wse classfcaton has also been consdered. Two Granger causalty test were run for both the classfcatons. In ths study, Grange causalty test was used to test the hypothess that there s no causal relatonshp between world FDI and other classfcatons of the world. The study addresses all the problems that come across durng the course of employng quanttatve technques. Granger Causalty Test The Granger causalty technque was proposed by Granger [12] and subsequently modfed by Toda and Yamamoto [13]. Ths test s usually preferred to other tests because t s very robust. In order to determne whether changes n one varable are a cause of changes n another, we employed the Granger (1969) causalty test. Granger causalty method of nvestgatng whether A causes B s to see how much of current B can be explaned by past values of B and then to see whether by ncludng lagged values of A we can mprove the explanaton of B. B s sad to be Granger-caused by varable A f A helps n the predcton of B, or f the coeffcents on the lagged A s are statstcally sgnfcant. The man dea of causalty s qute smple, f A causes B, then changes n A should precede changes n B [14]. Ths characterstc maes causalty test an mportant one n the test of endogenety. Y t 1. Y t 1 X t t (1) 9887

3 J. Basc. Appl. Sc. Res., 2(10) , 2012 Xt Yt X t t (2) Based on the equatons (1) and (2), four dfferent hypotheses about the relatonshp between these two varables can be formulated: Undrectonal Granger-causalty from X to Y. In ths case S ncreases the predcton of the economy but not vce versa. Thus 0 and Undrectonal Granger-causalty from Y to X. In ths case the Y ncreases the predcton of the X but not vce versa. Thus = 0 and 0 Bdrectonal (or feedbac) causalty. In ths case, and 0 and 0, so n ths case the Y ncreases the predcton of the X and vce versa. Independence between Y and X. In ths case there s no Grange causalty n any drecton, thus and Macroeconomc tme-seres data are usually non-statonary [16] and thus conducve to spurous regresson, therefore, before proceedng wth the Granger causalty test we test for statonarty of the data seres. A unt root test based on the structure n (3) was carred out n order to now about the problem of non-statonarty: n X t t X t X t t (3) In whch X s the varable under consderaton, s the frst dfference operator, t captures any tme trend, εt s a random error, and n s the maxmum lag length. If we do not reject the null hypothess θ = 0, then we conclude that the seres under consderaton has a unt root and s therefore non-statonary. Usng Evews pacage the statonarty of the varables were checed. Results showed that Oceana at level s statonary; Afrca at frst dfference become statonary and other varables at second dfferences become statonary. MacKnnon crtera used for rejectng hypothess at 1% level. We therefore proceed wth the Granger causalty test among all the varables usng second-dfferences of the respectve seres. Followng are the results of Granger causalty test RESULTS AND DISCUSSION It was qute obvous from the chart 1 that both world as well as developed countres FDI nflows was causng developng countres FDI nflows; however developng countres were causng nether world nor developed FDI nflow. On the other sde there was no relatonshp between world and developed FDI nflows. Chart 1 Granger causalty relatons between world, developed and developng countres 9888

4 Shahmorad and Kherandsh, 2012 Chart 2 Granger causalty relatons between world and other regons Chart 2 ndcates that world had bdrectonal causal relatonshp wth Asa and Afrca, whereas t had undrectonal causal relatonshp wth Europe wth world causng Europe nflows. Same has been observed n the Granger Causalty tests among world, developed and developng regons. Afrca s one of the regons whch was sharng bcausal relatonshps wth world as well as three regons namely Asa, Amerca and Oceana. Whereas Europe FDI nflows caused Afrcan FDI nflows and not vce versa, ndcatng undrectonal causal relatonshp. In case of Asa the Granger causalty test results ndcated Asa sharng bcausal relatonshp wth world, Afrca and Amerca. Le Afrcan case Asa had undrectonal relaton wth Europe. Amerca causes Asa, Afrca and Europe. Whereas, Amerca was caused by Oceana, Asa and Afrca. Thus s clear that Amerca had bdrectonal causal relatonshp wth Asa, Afrca and undrectonal wth Oceana and Europe. The strng aspect observed n the case of Europe s the fact that t shared undrectonal relatonshp and no bcausal relatons. Europe caused Asa, Afrca and gets caused by Amerca and world. Oceana has relatonshp wth only Afrca and Amerca. Wth Afrca t has two way relatonshps whereas wth Amerca t was one way wth Oceana causng Amerca. Concluson The Granger causalty test results for the dfferent regons of the world clearly complement the Granger causalty test results for world, developed and developng. Where both developed regons and world causes developng regon FDI nflows but developng does not causes nether world nor developed. The most mportant observaton s Asa and Afrca ndcatng smlar nd of Granger causalty test results. Both Afrca and Asa share bcausal relatonshps among themselves and wth world and Amerca. Europe causes both Asa and Afrca ths can be because of the applcaton of the theores of locaton as a regon, cost-reducton pressures, lberalzed nvestment envronment, nsttutonal prerequstes for attractng FDI and cultural proxmty for these two regons. The only dfference s the absence of causal relatonshp between Oceana and Asa and presence of bcausal relatonshp wth Oceana and Afrca. The smlarty of results for Afrcan and Asan regons can be attrbuted to the fact that both are potental maret for FDI nflows wth presence of vast area and populaton. REFERENCES 1. UNCTAD, World Investment Report 2009, Unted Natons: New Yor. 2. Lall, S., Monopolstc Advantages and Foregn Involvement by US Manufacturng Industry, Oxford Economc Papers 32(3): L, J.T. and Gusnger, S., The globalzaton of servce multnatonals n the trad natons: Japan, Europe, North Amerca, Journal of Internatonal Busness Studes 23(4):

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