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Marouane ALAYA C.E.D, University of Bordeaux IV

FDI AND GROWTH IN THE SOUTH COUNTRIES OF THE MEDITERRANEAN BASIN: AN ESTIMATION WITH A STRUCTURAL MODEL. Marouane ALAYA C.E.D, University of Bordeaux IV.

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Marouane ALAYA C.E.D, University of Bordeaux IV

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  1. FDI AND GROWTH IN THE SOUTH COUNTRIES OF THEMEDITERRANEAN BASIN: AN ESTIMATION WITH A STRUCTURALMODEL Marouane ALAYA C.E.D, University of Bordeaux IV

  2. In the 1950s and 1960s FDI and MNEs was considered by many developing countries as a menace to the national sovereignty and detrimental to the economic development. • Over the last couple of decades, the attitude towards inward foreign direct investment has changed considerably, as most countries have liberalized their policies to attract investments from foreign multinational corporations. • FDI is now considered as an important tool for economic development. This change of attitude toward FDI can be explained by many factors such a the worldwide context of economic liberalisation and the pressure on LDCs to resolve their economic problems like unemployment, the lack of domestic investment ant the need to have modern technologies.

  3. Like many other developing countries, Southern Mediterranean Countries have made the remarkable transformation from being hostile to foreign direct investment in the 1970s to eagerly attracting multinational firms. • Although having real advantages such as their geographical proximity to the European Union and a relatively cheap labour cost, the economies of the South shore of Mediterranean are excluded from the surge of FDI toward the emerging countries. • It’s interesting to sea how the foreign direct investment has contributed to the economic growth of Mediterranean LDCs.

  4. Our proposal can be justified by the important potential effect of FDI on host economies such as described by many scholars and empirical studies about this topic. In fact for the vast majority of politicians, international institutions, and economists, FDI appears to be a sort of panacea for every economic problem. Its positive impact on economic growth has acquired the status of conventional fact. The almost desperate effort efforts of many countries to attract as much FDI as possible indirectly support this point of view. • The advanced general argument is that the FDI can contribute to the economic development thanks to the spillovers effects which occur through the development of human and physical capital, the intensification of international trade and the transfer of technology.

  5. The spillover effects of FDI are interlinked, complementary and cannot possibly be discussed separately. The interaction is such that gains in one factor may stimulate improvement in one or more of the others, thus magnifying the stimulus or forming a synergy.

  6. Presentation of the model • Gr = ƒ (FDI, KH, EXPORT, DI) [eq.1] • DI = ƒ(Gr,FDI, CREDIT, INTEREST, DS) [eq.2] • EXPORT=ƒ(FDI, XR,Btrade) [eq.3] • KH=ƒ (FDI, GE, Urban, TEL) [eq.4] • FDI = ƒ (Cr, ENERGY, KH, OPEN, REM) [eq.5]

  7. Domestic Investment (DI) DI=ƒ (Gr, FDI,CREDIT, INTEREST, DS) + +/- + - + Economic Growth Gr = ƒ (FDI, KH, EXPORT, DI) + + + + Human Capital (KH) KH=ƒ (FDI,GE,Urban,TEl) + + + + Foreign Direct Investment (FDI) FDI = ƒ (Gr, ENERGY,KH, open,REM) + + + + +/- Exports (EXPORT) EXPORT = ƒ (FDI, XR, Btrade) + + -

  8. Endogenous variables • Gr : Growth rate of real GDP per capita. • DI: Annual percentage ratio of gross fixed capital formation to GDP. • EXPORT: Total annual exports of goods and services as a percentage ratio of GDP. • FDI: Annual percentage ratio of FDI to GDP. • KH: School enrolment, secondary (% gross).

  9. Exogenous variables • Btrade: Taxes on international trade in percentage of current revenue (approximation of transaction costs at export). • CREDIT: Domestic credit to the private sector expressed as percentage ratio of GDP (approximation of the availability of financial institutions). • GE: Annual government expenditure on education as a percentage ratio to GDP. • ENERGY: Energy production (KT of oil equivalent). • DS: Gross domestic savings (% of GDP). • INFLATION: GDP deflator (annual %). • INTEREST: Real interest rate (%) (the cost of capital). • M2: Money and quasi money as a percentage of GDP (approximation of financial market).

  10. Exogenous variables • OPEN: The level of openness of the economy proxied by exports plus imports as a percentage ratio of GDP. • GDP: Gross domestic production in million of dollars. • REM: host country’s remoteness is the weight average distance to all the other countries in the world. • XR: is the exchange rate (local currency per 1US$). • URBAN: Urban population in percentage of total [approximation of the facility to access at different institutions (social, cultural, medical, etc)]. • TEL: Telephone mainlines per 1000 people (approximation of telecommunication infrastructure).

  11. Estimation method • Before proceeding with regression analysis using the panel data, the results of single regressions for each county are examined and in that way clues about possible country groups which share common growth elasticities to macroeconomic variables, are captured. In fact, the southern Mediterranean countries are too different to be considered an area, (DREE, 2003 and Giovannetti & Ricchiuti, 2005).

  12. Estimation method • Division of the sample in three " homogeneous " groups. • G1: Morocco, Tunisia, and Turkey. • G2 : Algeria and Egypt. • G3: the third group is formed by Jordan and Syria. • Two- stage least squares (2SLS) estimation technique has been employed using the panel data from 1975- 2002 for each country’s group and the selection of fixed effect model.

  13. Empirical results • Assumption:FDI is of vertical nature. • The determinants of FDI.

  14. Empirical results Effects of FDI on economic growth and its determinants.

  15. Conclusion • Empirical results from our model indicate that the human capital and to a lesser extent exports, are the most dynamic factors in the creation of positive spillovers. However, these externalities do not seem to be important, to generate a positive growth or at least to compensate for the negative effects of the FDI. • Our finding is in opposition to the generally allowed idea which tends to suppose that; spillovers benefit from FDI occur automatically. The euphoria of the developing countries in attracting the international investment could be an irrefutable proof.

  16. For developing countries and particularly for SouthernMediterranean countries, the central challenge is not to attract FDI (since this doesn’t constitute a guarantee for having beneficial effects of FDI), but to know how to reap advantages from the presence of foreign affiliates in their countries. So, in their economic decision, policymakers of Mediterranean LDCs must take account of the quality of FDI, and therefore select the appropriate advantages to attract the right kind of it.

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