Chapter One Introduction
1.1 Problem of the Statement
The role of foreign direct investment (FDI) in developing CIS countries has growndramatically over the 1992s and 2018s. To get an example from Russian Federation, from $672million in 1992 to $74.7 billion in 2008 rising 110-fold before mortgage crisis and to $8.7billion in 2018, rising at least 12-fold. Or Kazakhstan from $100 million in 1992 to $2.5 billionin 2008 rising 25 fold before mortgage crisis and to $213 billion in 2018, rising at least 2-fold(UNCTAD, 2019).
This study aims to investigate causality between FDI, General Government finalconsumption expenditure (GE), Export (EX), import (IM) and economic growth for 9developing CIS economies as Armenia, Azerbaijan, Belarus, Moldova, Russian Federation,Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan), based on a theoretical framework and aestimation method that has been developed fairly recently. I would like to remind that 9 CIScountries start to be independent form post-Soviet period from 1991 and it was important to thatcountries to develop economy and growth.
However, within this research, it is designed to exist a well-organized literature on FDIconcern and use causality tests for analyzing the relationship between FDI, GovernmentExpenditure, Export, Import and GDP growth nexus. With making an allowance for the studiesidentified above, the impact of this work to the literature develops by means of reviewing therelation between FDI and economic growth [growth in gross domestic product (GDP)] in CIScountries within the period 1992–2018 by using the Johansen cointegration test and Grangercausality analysis as well as least squares method to illustrate that FDI and other variables hassignificant role to promote economic growth for the mentioned period of time.
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1.2 Objective of the study
The main objectives of the study is to find the impact of foreign direct investment oneconomic growth in CIS countries. Specifically, the study seeks to:
1. Examine the effect of foreign direct investment on economic growth
2. Examine the impact of government expenditure, import and export on economic growth
Commonwealth Independent States has not a long history. After collapse of the SovietUnion every country starts to be independent and in the same time cooperate with each otherand unite to make one union group. The CIS encourages cooperation in economic, political andmilitary affairs, and has certain powers related to the coordination of trade, finance, lawmakingand security. Financial sector and economic growth was the main point to all that 9 countriesfrom the period of 1991, because independently each country have to has their economy muchmore stable and improve it annually. This study seeks to contribute to the knowledge lack ofFDI and economic growth in 9 CIS countries. This study will inform policy makers in CIS as awhole as to which policy measures to implement in the financial sector to ensure economicgrowth in that countries.
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Chapter Two Background Research on FDI in CIS Countries
2.1 What negatively affect FDI in CIS countries?
With the trend towards liberalizing investment regimes and some improvement in theinvestment climate that has emerged over the years of reformation in the CIS countries, there area number of specific problems that negatively affect the development of investment interactionboth within the CIS and with investors from abroad.
In particular, they include:
1. Political and economic instability in a number of CIS countries.
2. Weak legal infrastructure and insufficient legislative support foreign investment.Although the legislative acts of the CIS countries mostly contain the correspondingarticles on guarantees to foreign capital are sometimes declarative, and frequent changesto the "rules of the game” add to the element of uncertainty in the activities of foreigninvestors.
3. Incomplete reform of the CIS economies. The main constraining factors here are: thecollapse of the decentralization of economic management, the non-modern sectoralstructure of economies and their raw materials orientation, and the incompleteness ofstructural transformations.
4. Non-convertibility or partial convertibility of national currencies.
5. Weak development of the banking system and stock markets of the CIS countries, theirbanks are weak, and national banks are not actively involved in the development of thereal sector of the economy.
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2.2 The classification of countries of the Commonwealth
In the analysis of FDI inflows to the CIS countries it is possible to pide these Statesinto three key groups. First of all, there is a group of energy exporting countries (Azerbaijan,Kazakhstan, Russia and Turkmenistan). FDI in these countries differs from investment in otherCommonwealth States, since it is mainly directed to the fuel and energy complex (FEC). Themotivation for such investments is different from the motivation for investment in other sectorsof the economy - here, industry-specific factors come to the front: size, quality and geographicallocation of resources. In addition, from the average for the economy tax regime in the extractivesectors often varies significantly. At the same time, the experience of Russia and Kazakhstanshows that even in such a specific area of investment as the fuel and energy sector, the overallinvestment climate (legislative support, transparency and quality of corporate governance)significantly affects investment decisions.
As an example in 2008, Azerbaijan's foreign investment decreased by 16.3% to $ 2.777billion or 24.5 % of all investments. The United Kingdom invested $ 1,274.2 million inAzerbaijan's economy or 45.9% of all investments (-12.2%). Investments from the United Statesdecreased by 29.5% to $ 541.1 million, Japan invested $ 276.7 million. (-31.4%), Turkey -$ 183.9 million. (-7.5%), Norway - $ 173.2 million. (-31.5%), Russia - $ 12.4 million. (Growthof 6.8 times). In the three quarters of 2009, $3 billion 627 million of foreign investment wasinvested in the economy of Azerbaijan, which is $1 billion 780 million, less than for thecorresponding period of last year. I would like to note that in the three quarters of 2008, thevolume of foreign investment was $5 billion 407 million, with an increase of 4.8%. In 2018 thisindicator is just around 1.4 billion $, what 2.6 billion $ less than in 2015.The growth of FDIinflows to the Republic of Kazakhstan in 2008 was 7.3 % (19.8 billion us dollars) in relation tothe previous year. In 2007, compared to 2006 (10.6 billion dollars), the increase was 73% (18.5billion us dollars.). In 2008, gross outflows of FDI amounted to $ 4.24 billion, which is 60.9%higher than in 2007. The structure of gross foreign direct investment inflows by country in thereporting period was dominated by the Netherlands (22.0% of gross FDI inflows), the UnitedStates (10.4%), the United Kingdom (9.1%), France (6.1%), the Cayman Islands (British) –4.9%, and Canada (4.8%). Gross FDI inflows from CIS countries increased by 10.6%,amounting to $ 887.3 million. We also can watch the growth of FDI in Russia up to $ 74.7billion in 2008, but after mortgage crisis that indicator decrease to $ 43 billion in 2010 and $ 6.8billion in 2015.
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Chapter Three Literature Review...............................17
3.1 Introduction...............................17
3.2 Theoretical literature.............................17
Chapter Four Research Methodology.........................................34
4.1 Introduction.............................34
4.2 Area profile.................................... 34
Chapter Five Data and Method...........................42
5.1 Empirical analysis................................42
5.2 Comparison study.........47
Chapter Five Data and Method
5.1 Empirical analysis
In the study the augmented Levin, Lin & Chu and Im, Pesaran and Shin panel unit roottests are applied to test the stationarity of the panel data used. Before determining therelationship between the variables, we need to test the stationarity of the series. Because whennonstationary variables are used, the regression analysis could not show up consistent and a nullregression problem may give the impression. In order to test the unit root in empiricalinvestigation, different panel unit root tests usually applied by researchers. However, due tomore applicability, this study used Levin, Lin & Chu and Im, Pesaran and Shin panel unit roottests to test the unit root analysis. It is important to regulate a suitable lag length in VARsystems. If the lag length is too small, the model which the study tries to estimate may havespecified wrong, and if it is too large, degrees of freedom are indolent. Through research, theoptimal lag length is determined by the Schwarz information criterion (SC). Stationary timeseries inclines to return their mean value and fluctuate around within a more-or-less constantrange. Alternatively, non-stationary variables become stationary after having differentiated, andin this case first-order differentiation is usually sufficient. The extent to which a variable isstationary depends on whether it has a unit root or not.
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Chapter Six Conclusion
6.1 Introduction
This chapter presents an overview of the study. It gives aconclusions drawn from the study and recommendations for policy consideration andimplantations.
The study aims to assess and estimate the impact of FDI on economic growth in 9 CIScountries for the period of 1992-2018. Based on the results of Levin, Lin & Chu and Im,Pesaran and Shin test, it is decided that the variables are mix order of integration. Since, thevariables are mix order of integration, hence, this study applies panel cointegration technique toexamine the long run relationship among the variables GDP and its determinants FDI, GCE,EXP and IMP. For this purpose, this study employs Westerlund (2007) panel cointegration test.The results of Westerlund ECM panel cointegration test demonstrate that there existcointegration among the variables GDP and its determinants FDI, GCE, EXP and IMP. Afterconfirmation of cointegration among variables used in model, this study employs AugmentedMean Group method to estimate the long run coefficients. AMG method is popularized byEberhardt & Tea (2010). Moreover, due to endogeneity problem, this study employs 2SLSmethod to investigate the relationship between FDI and economic growth in the presence ofGCE, EXP and IMP. The results of AMG and 2SLS methods show that FDI, GCE, EXP andIMP are important factor in explain economic growth of CIS countries. The results ofDumitrescu Hurlin panel Causality Test show that there is a bi-directional causality of GDP withLPFDI A change in policy in FDI significantly change the GDP of sample countries. Moreover,any change in policy of economic growth significantly change FDI. The results further showthat there is one-way causality from exports to GDP and from GDP to imports. Empirical resultsfrom the study can be summarized as follow. Firstly, FDI flows promote economic growth inCIS countries and have positive effect in long run relationship. Secondly, governmentexpenditures, goods import and export also showed a positive relationship with economy growth.As a result, it can be declared that FDI is an important factor for economic growth in long runrelationship, especially for developing countries like CIS. Results show that there is a strongcomplementary connection between FDI and economic growth, it has statistically highlysignificant effect on the input growth component of economic growth. Efforts to attract FDI forpromoting growth in that economies should be encouraged.
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