Economic Analysis & Policy, Vol. 41 No.

2, september 2011

Economic Growth and FDI in Asia:

A Panel-Data Approach

Aviral Kumar Tiwari1

Research scholar and Faculty of Applied Economics,
Faculty of Management, ICFAI University, Tripura,
Kamalghat, Sadar, West Tripura, 799210, Room No. 405,
India
(Email: [email protected])

and

Mihai Mutascu2
LEO (Laboratoire d'Economie d'Orléans) UMR6221,
Faculté de Droit d'Economie et de Gestion, University of Orléans,
Rue de Blois – B.P. 6739, 45067, Orléans,
France
(Email: [email protected])

Abstract: This study examines the impact of foreign direct investment on economic growth in Asian
countries. We did our analysis in the panel framework for the period 1986 to 2008. We
also examined the nonlinearities associated with foreign direct investment and exports in
the economic growth process of Asian countries under consideration. We find that both
foreign direct investment and exports enhance the growth process. In addition, labour
and capital also play an important role in the growth of Asian countries. We suggest an
export-led growth path particularly at the initial stage of growth and in the later period,
dependence on FDI might be a feasible option.

I. Introduction
Economists, researchers and policy analysts have given considerable attention to the relationship
between economic growth and foreign direct investment (FDI), especially in developing
countries. It is a widely accepted argument that openness of an economy boosts economic
1 We thank our colleagues, Loretti Isabella Dobrescu (University of New South Wales), Claudiu Albulescu
(Research Centre on Economic and Financial Integration, Université de Poitiers) and Domenico Consoli
(University of Urbino), for their thoughtful comments and suggestions. Other thanks go to Miriam Hatoum
(Boston University). We would also like to thank the anonymous referee for his/her constructive suggestions
for improving the paper. All remaining errors are ours.
2 Corresponding author: ([email protected])

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 Economic Growth and FDI in Asia: A Panel-Data Approach

growth irrespective of whether an economy is developed or developing. The two dimensions

of openness are free trade in goods and services, and free international capital flow, with the
former further divided into exports and imports. While earlier studies have investigated export-
led growth and/or import-led growth and/or capital-led growth, the present study employs a
panel-data model for the period 1986-2008 for 23 developing Asian countries, in order to analyze
FDI-Growth and Export-Growth nexus. The study also examines the impact of nonlinearities
associated with the relationship between FDI and growth, and exports and growth. The results
show that export-led growth policies are more effective for growth enhancement of developing
Asian countries than FDI-led growth.
Whereas exports stimulate economic growth primarily from the demand side, they also
produce efficiency gains on the supply side by way of global competition. Further, the argument
to assess FDI-led growth is in line with Anwara and Nguyen (2010) who identified a number
of determinants of the linkage between FDI and economic growth. In addition to that, as
liberalization has different components and almost every country of the world is striving to
liberalize the home economy in order to realize the gains from it, it is particulary useful to
know which way of liberalization is more beneficial for the economies in terms of growth
enhancement. This is because liberalization brings different kinds of social problems. For
a detailed review of literature and discussion see, for example, Tiwari (2010a, 2010b) and
Tiwari and Aruna (2011). In this regard, we have focused only on exports and FDI in order to
analyze the “FDI – growth and export-growth” nexus in 23 developing Asian countries, using
a panel-data model during the period 1986 to 2008. Further, we also attempt to examine the
impact of nonlinearities associated with the relationship between FDI and growth and exports
and growth. Interestingly, the study reveals that export-led growth is a better option for the
growth enhancement of developing Asian countries than FDI-led growth.
Schutz (2001) defined growth as the sustained rise in quantity and/or quality of the
goods and services produced in an economy. Since the 1950s, economic-growth theory has
evolved rapidly as two distinct generations of models. The first generation of growth models
(exogenous-growth models), inspired by the neoclassical model, with exogenous sources of
long-term growth, dominated the literature until late 1960s when focus shifted to inflation and
unemployment as growth determinants. The second generation of growth models (the new
growth models or endogenous-growth models) advanced with the theory of Romer (1986).
These models focus on economic growth rate as a result of rational and optimal agent’s
behaviour, and the structural characteristics of the economy and macroeconomic policy.
Recently, the models developed by Lucas (1988) and Barro (1990) show that technology plays
a fundamental role in the process of economic growth. Moreover, these models incorporate a
new concept regarding human capital, skills and knowledge. Endogenous-growth models were
recently combined with studies on the diffusion of technology in an attempt to emphasize the
role played by FDI in the economy (Bashir 1999). An extensive definition of FDI is provided
in 1996 by the Organisation for Economic Co-operation and Development (OECD) which
states that the FDI reflects the objective of obtaining a lasting interest by a resident entity in
one economy (direct investor) other than that of the investor (direct-investment enterprise).
This emphasizes the role FDI plays in the development of the economy by acting as another
factor input of production (Shahbaz and Rehman 2010).

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 Aviral Kumar Tiwari and Mihai Mutascu

The rest of the paper is organized as follows: Section II contains the literature review.
Section III presents methodology, variables’ description and data. Section IV shows estimation
and empirical results. Section V concludes.

II. Literature
Kaldor (1963) documented mechanisms that explain economic growth. Examples of these
mechanisms are the growth in per-capita output and per-capita physical capital over time,
constant ratio of physical capital to output over time, the constant rate of return to capital,
constant share of labour and physical capital in national income, and the substantial difference
in the growth rate of output per worker across countries. Similarly, Anwara and Nguyen (2010)
identify several determinants of the link between FDI and economic growth. Some of these
determinants are, for example, human capital, learning by doing, exports, macroeconomic
stability, and level of financial development, public investment. These are in addition to those
that Shahbaz and Rehman (2010) identified as determinants of economic growth, including
foreign direct investment. They also reported that foreign direct investment, financial
development, public investment, human capital, trade openness and inflation have positive
effects on economic growth. Neuhause (2006), based on these determinants, shows that there
are three main channels through which FDI can influence the technological change, improve
the capital stocks and generate economic growth: (a) direct transmission (through “Greenfield
Investments”), (b) indirect transmission (through “Ownership Participation”), and (c) second-
round transmission (through “Technology Spillover”).
Recently, the number and quality of the analyses regarding the relationship between the
economic growth and FDI are prolific. In research focusing on China, Dees (1998) finds that
the FDI affects Chinese growth through the diffusion of ideas. FDI presents a significant
positive effect on Chinese long-term growth through its influence on technical change (this
is significant only in the 1990s).
The same potential positive effect of FDI on growth, in China’s case, was illustrated by
Berthélemy and Démurger (2000). In a Generalized Method of Moments (GMM) approach,
the authors provide new evidence on the role of human capital in Chinese provincial growth,
and stress that human capital may contribute to growth by facilitating the adoption of foreign
technologies. Moreover, the study shows that the direct impact of export growth disappears
when both exports and foreign investment are introduced in the growth regression.
Using co-integration and an error-correction model to examine the link between FDI and
economic growth in India, Chakraborty and Basu (2002) suggest that GDP in India is not
caused by FDI, and the causality runs more from GDP to FDI. In the same context, Alfaro
(2003) has made a sectoral panel OLS analysis, using cross-country data for the 1981-1999
period. The main results allow us to conclude that FDI in the primary sector tends to have a
negative effect on growth, while investment in manufacturing has a positive one.
In Thailand’s case, using data from 1970 to 1999, and the vector error correction approach,
Kohpaiboon (2003) has introduced the export variable in the growth-FDI equation. He finds a
unidirectional causality from FDI to GDP and shows that the impact of growth on FDI tends
to be greater under an export-promotion (EP) trade regime compared to an import-substitution

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 Economic Growth and FDI in Asia: A Panel-Data Approach

(IS) regime. Balamurali and Bogahawatte (2004) also found the same results for Sri-Lanka.
They emphasize that trade policy reforms (promotion of FDI and domestic investment) and
restoring international competitiveness to expand and diversify the country’s exports, have
the potential of accelerating economic growth in the future.
In a vector autoregressive model, using seasonally adjusted quarterly data of Mexico,
Brazil, and Argentina, from late 1970 to 2000, Cuadros et al. (2004) illustrate the same
unidirectional causalities from real FDI and real exports to real GDP in Mexico and Argentina,
and unidirectional causality from real GDP to real exports in Brazil. Cho (2005) has applied
the panel-data causality for nine East and Southeast Asian economies (plus Indonesia), from
1970 to 2001. The results stress a strong unidirectional causality from FDI to exports among
the three variables.
Hsiao and Hsiao (2006) set up a panel vector autoregressive model in the case of China,
Korea, Taiwan, Hong Kong, Singapore, Malaysia, Philippines, and Thailand. Their results
reveal that FDI has unidirectional effects on GDP directly and also indirectly through exports,
and there exists bidirectional causality between exports and GDP for the group. Baharumshah
and Thanoon (2006), by using dynamic-panel models, demonstrated the positive contribution
of FDI on the growth process of East Asian economies. In other words, the countries that are
successful in attracting FDI can finance more investments and grow faster than those that
deter FDI.
Alfaro et al. (2006), using an extended dataset, found that the same amount of increase
in FDI, regardless of the reason of the increase, generates three times more additional growth
in financially well-developed countries than in financially poorly-developed countries. In the
case of East European countries, similar results were found by Bhandari et al. (2007), based
on a panel-GLS model. The conclusions are that an increase in the stock of domestic capital
and inflow of FDI are main factors that positively affect economic growth.
Won et al. (2008) have analyzed the case of newly industrialized Asian economies by
using panel-vector autoregressive models and show that the openness of the economy is, as
manifested by exports and inward FDI, among others, the most important economic factor
attributed to the rapid growth of these economies. Shahbaz et al. (2008) use Pakistani data after
the SAP (structural adjustment program) to fix the main determinants of economic growth.
The ARDL-bounds testing approach to cointegration was applied to investigate long- term
relationships. The empirical evidence confirms the existence of cointegration i.e., long- term
relationships exist between the variables. The impact of foreign direct investment, financial
development, remittances and public investment is positive on economic growth, while trade
openness and inflation slow the pace of economic growth. Moreover, in the case of Gulf
Cooperation Council (GCC) countries,3 the OLS panel approach of Faras and Ghali (2009)
stress that, for most of the GCC countries, there is a weak but statistically significant causal
impact of FDI inflows on economic growth.
Karimi and Yusop (2009), based on a simple OLS regression, studied Malaysia’s “growth-
FDI” link. According to them, there is a range of possible factors that ensures that FDI promotes
or hinders economic growth. At the same time, these determinants are likely to differ between
3 Gulf Cooperation Council is a political and economic alliance of six Middle Eastern countries: Saudi Arabia,
Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman.

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 Aviral Kumar Tiwari and Mihai Mutascu

countries and between types of FDI and sectors of destination. The GMM estimation of Anwara
and Nguyen (2010), who focused on the Vietnamese “growth-FDI” connection, showed the
importance of the role of education and training. The results suggest that the impact of FDI
on economic growth in Vietnam will be larger if more resources are invested in education and
training, and financial market development, and also invested in reducing the technology gap
between foreign and local firms.
Similar conclusions were reached by Jayachandran and Seilan (2010) in the case of India,
concluding that FDI and exports are among the factors affecting economic growth. However,
the reciprocal does not apply. The high or low economic growth rate does not have an effect
on the presence of FDI and exports in India. Further, Wijeweera et al. (2010) argued that FDI
inflows exert a positive impact on economic growth, however, only in the presence of highly
skilled labour. Moreover, they found that corruption has a negative impact on economic growth,
and trade openness increases economic growth by means of efficiency gains.
We observe that several studies have focused on the case of developing countries and
for the major part, stress that FDI, adjusted to other determinants, has a significant positive
effect on economic growth. However, none of these studies has analyzed the nonlinearities
associated with FDI that affect the economic growth process of the host country. Therefore,
we have moved ahead in this direction and have also provided the case of export-led growth
or FDI led-growth.

III. Data and methodology

The present study is intended to examine whether FDI has an impact on the economic growth
of 23 Asian countries (see Appendix). However, we have also made an attempt to analyse the
role of exports in the growth enhancement of these countries. The significance of this study
lies in attempting to provide the answer of the question: is FDI-led growth better or is export-
led growth better?
Further, we also examine the nonlinearity associated with the relationship between the
FDI-growth and export-growth nexus. To achieve our objectives, we moved ahead in the
production function framework. Suppose the factors of production and the production technology
determine the level of output in an economy according to:

Y = f (K, L), (1)

where Y denotes the output level (i.e., GDP per capita), K denotes the amount of capital (which
is measured by Gross Capital Formation (GCF) as percentage of GDP), and L denotes the
amount of labour (measured by labour force of the country). Assuming constant technology,
any increase in the amount of labour and/or capital will increase the level of output in the
economy. This production function is expanded according to the new growth theory by following
Barro and Sala-i-Martin (1995).4
To this respect, Mankiw (2004) states that international trade affects economic growth
and can indeed be regarded as a type of technology in that it converts non-specialized

4 There are several channels for promoting economic growth such as encouraging domestic saving and investment,
foreign investment, education, R&D and free trade.

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 Economic Growth and FDI in Asia: A Panel-Data Approach

production into specialized production. Hence, according to the new growth theory, export
expansion improves economy-wide efficiency in the allocation of inputs, and leads to total
factor productivity growth. From a demand-side point of view, an inward-oriented policy is
not sustainable since domestic demand is limited and domestic resources may remain idle and
hence, domestic economic growth cannot be enhanced.
Agosin (1999) and Boriss and Herzer (2006) illustrate that, in an outward-oriented country
with free trade, exports are the engine of growth through the expansion of external demand, as
a component of the aggregate demand function. On the supply-side, Grossman and Helpman
(1991) demonstrate that exports can positively contribute to economic growth through different
means, such as facilitating the exploitation of economies of scale, or promoting the diffusion
of technical knowledge.
Therefore, production function can be expanded by adding exports (denoted by X) as
an extra variable. Additionally, Ögütçü (2002) argues that FDI is a major catalyst for the
development and the integration of developing countries in the global economy. According
to Chen (1992), the positive developmental role of FDI, in general, is well documented. FDI
produces a positive effect on economic growth in host countries.
One convincing argument for that is that FDI consists of a package of capital, technology
management, and market access. FDI tends to be directed at those manufacturing sectors and
key infrastructures that enjoy actual and potential comparative advantage. In those sectors with
comparative advantage, FDI would create economies of scale and linkage effects, and raise
productivity. For FDI, repayment is required only if investors make a profit and when they
make profit, they tend to reinvest their profit rather than remit abroad. Another benefit of FDI
is a confidence-building effect. While the local economic environment determines the overall
degree of investment confidence in a country, inflows of FDI could reinforce the confidence,
contributing to the creation of a robust cycle that affects not only local and foreign investment
but also foreign trade and production.
Based on the results of Blömstrom et al. (2000), the experience of many countries suggests
that a significant quantity of FDI alone is not sufficient to generate economic growth and bring
economic prosperity to a host country.
Therefore, we have also added FDI in the production function to analyse its impact on
economic growth. The augmented production function can be written as follows:

Y = f(K, L, FDI, X). (2)

The most commonly used ways of assessing the relationship between economic growth and
its determinants as mentioned in equation (2), is the static panel data models. In this study,
based on the result of Dielman (1989), we have preferred the panel-data analysis technique as
it has an advantage of containing the information necessary to deal with both the intertemporal
dynamics and the individuality of the entities being investigated.
There are basically three types of panel-data models namely, a pooled Ordinary Least
Squire (OLS) regression, panel model with random effects and panel model with fixed effects.5

5 We accessed data of FDI from UNCTAD (www.unctad.org), GDP per capita from Historical Statistics of
the World Economy: 1-2008, AD from Angus Maddison and other variables from World Bank Development
Indicators data base of World Bank. Study period is 1986 to 2008.

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 Aviral Kumar Tiwari and Mihai Mutascu

Considering the extended production function of equation (2), the evaluation of a pooled OLS
regression can be specified as follows:

Yit = ß0 + ß1(Kit) + ß2(Lit) + ß3(FDIit) + ß4(Xit) + εit , (3)

where i denotes country, t denotes time and remainder εit is the error term which is assumed to
be white noised and varies over both country and time. However, while using a pooled OLS
regression, countries’ unobservable individual effects are therefore not controlled. According
to Bevan and Danbolt (2004), heterogeneity of the countries under consideration for analysis
can influence measurements of the estimated parameters.
Further, using a panel-data model with incorporation of individual effects, has a number
of benefits, for example, among others, it allows us to account for individual heterogeneity.
Indeed, Serrasqueiro and Nunes (2008) and Tiwari and Kalita (2011) mentioned that developing
countries differ in terms of their colonial history, their political regimes, their ideologies and
religious affiliations, their geographical locations and climatic conditions, not to mention a
wide range of other country-specific variables. And, if this heterogeneity is not taken into
account, it will inevitably bias the results, no matter how large the sample is.
Therefore, by incorporating countries’ unobservable individual effects in equation (3) the
model to be estimated is as follows:

Yit = ß0 + ß1(Kit) + ß2(Lit) + ß3(FDIit) + ß4(Xit) + wit , (4)

where wit = μi + Eit with μi being countries’ unobservable individual effects. The difference
between a polled OLS regression and a model considering unobservable individual effects,
lies precisely in μi. When we consider the random-effect model, equation (4) will be same.
However, in that case, μi is presumed have the property of zero mean, independent of individual
observation error term εit, has constant variances σ ε2 , and is independent of the explanatory
variables.
However, there may be a correlation between countries’ unobservable individual effects
and growth determinants. If there is no correlation between countries’ unobservable individual
effects and growth determinants, the most appropriate way of carrying out the analysis is using
a panel model of random effects. On the contrary, if there is a correlation between countries’
individual effects and growth determinants, the most appropriate way of carrying out the
analysis is to use a panel model of fixed effects.
To test for the possible existence of a correlation we use the Hausman test. This test tests
the null hypothesis of non-existence of a correlation between unobservable individual effects
and the growth determinants, against the alternative hypothesis of an existence of a correlation.
If the null hypothesis is not rejected we can conclude that correlation is not relevant and
therefore a panel model of random effects is the most correct way of carrying out the analysis
of the relationship between economic growth and its determinants. On the contrary, if the
null hypothesis is rejected, we can conclude that correlation is relevant and therefore a panel
model of fixed effects is the most appropriate way to carry out the analysis of the relationship
between economic growth and its determinants.
Further, unlike previous studies which have analyzed the impact of FDI and exports on

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 Economic Growth and FDI in Asia: A Panel-Data Approach

economic growth by using only the one-way error component model (i.e., either fixed effect
or random effect is present in the model), we have analyzed the model in which two-way error
components are present. Therefore, by expanding equation (4) to incorporate the two-way
error component model, the equation becomes as follows:

Yit = ß0 + ß1(Kit) + ß2(Lit) + ß3(FDIit) + ß4(Xit) + µit , (5)

where µit = wit + λt = µi + λt + εit , µi denotes the unobservable individual effect, λt denotes
the unobservable time effect, and εit is the remainder stochastic disturbance term. Note that
λt is individual-invariant and it accounts for any time-specific effect that is not included in
the regression. For example, it could account for strike-year effects that disrupt production;
oil-embargo effects that disrupt the supply of oil and affect its price; Surgeon General reports
on the ill-effects of smoking; or government laws restricting smoking in public places, all of
which could affect consumption behaviour. If µi and λt are assumed to be fixed parameters to
be estimated, and the reminder disturbance is stochastic with εit IID (0,σ ε2 ) , then equation
(4) represents a two-way fixed effect error component model.6
Similarly, nonlinearity of exports-growth relationship has also been incorporated in the
model.

IV. Estimation and empirical results

Results of panel data models have been presented in Table 1.
From Table 1, it is evident that the results of the Wald test and F-test are significant at a
1% level of significance in all panel-data models. Therefore, we can conclude that we cannot
reject the null hypothesis that the explanatory variables do not explain (taken as a whole) GDP
per capita and hence, the determinants selected in this study can be considered to be enough
of an explanation of the economic growth determinant. Although this is true, in case of the
Hausman test, we reject the null hypothesis of correlation between countries’ unobservable
individual effects and economic growth determinants.
This implies that for our analysis, a random-effect model is more appropriate. However, if
we compare the sign and significance of coefficients associated with the respective variables,
we find that results reported in models 1 and 2 are the same (except the constant term that is
significant for the random-effect model, while insignificant for the fixed-effect model).
Both models, i.e. model 1 and model 2, show that FDI, exports and labour force have
positive and significant impact on the economic growth of the panel countries. However,
the coefficient of GFCF carries a negative sign but is highly insignificant. Further, when we
examine nonlinearity of FDI by incorporating the square value of FDI and we perform the
analysis based on random-effect and fixed-effect models, we find, from model 3 and 4, the
same results in terms of sign and significance of the coefficients associated with variables
in both cases (except the fixed-effect model labour force and constant term are significant,
while in the random-effect model we do not find the same). However, the Hausman test in this
6 In the case of a time-fixed effect model, λt is a time-varying intercept that captures all of the variables that
affect the dependent variable and vary over time but are constant cross-sectionally, and the opposite holds in
case of a time random-effect model.

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 Table 1: Regression Results of First Specification
Panel data Models: Dependent variable GDP per capita
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 6 Model 7
Independent
variables Two way RE
FE RE FE RE RE-CS: PR-FE Two way RE RE with AR(1)
And CSW
80.00*** 77.47*** 72.16** 68.99** -78.00** 69.9975** 69.99745** 19.66703
FDI
(17.1451) (17.1151) (32.151) (32.053) (32.1017) (32.52973) (31.24509) (15.61716)
-99.14*** -95.84*** -67.46** -96.24*** -96.24*** -24.304***
D(FDI) ------- -------
(22.1377) (22.098) (20.5664) (22.4216) (23.689) (7.981435)
3.224** 3.054** 6.78*** 3.05321** 3.053212* 0.7767105*
FDI*FDI ------- -------
(1.368299) (1.36211) (1.2951) (1.382451) (1.641654) (0.4305877)
-3.642*** -3.389*** -3.564*** -3.4122*** -3.412199** -0.5623656
D(FDI)*D(FDI) ----------- ----------
(1.242249) (1.23551) (1.14377) (1.254283) (1.367031) (.4014784)
77.50*** 81.19*** 72.33*** 78.31*** 46.72*** 77.556*** 77.556*** 30.17081***
X
(5.2153) (5.011174) (5.469286) (5.1424) (5.5688) (5.265174) (5.553573) (4.601944)
1.11E-05*** 4.99E-06* 1.29E-05*** 3.91E-06 -2.91E-06 4.79E-06* 4.79E-06** 9.33e-07
LF
(3.81e-06) (2.91E-06) (3.93E-06) (2.67E-06) (2.65E-06) (2.86E-06) (1.88E-06) (4.12e-06)
-14.67502 -11.18523 -13.44261 -7.883985 -27.019** -8.603529 -8.603529 30.3044***
GCF
(11.305) (11.22578) (11.21285) (11.091) (10.783) (11.26808) (11.02927) (6.656886)
2319.127 2448.03*** 2408.4*** 2563.42 5156.41*** 2558.9*** 2558.9*** 4381.65***
Constant
(374.131) (783.7958) (385.7225) (672.788) (408.3752) (739.8539) (701.871) (857.6249)
Model summary
R2 0.939031 0.430405 0.946816 0.458357 0.573270 0.458075 0.458075 0.5024
Wald chi2 395.96*** 74.61***
F-test 297.37*** 98.988*** 292.21*** 60.20*** 22.89*** 60.14*** 60.14***
Hausman test 10.165** 13.35**
Fixed effect F(22, 502) = F(22, 476) =
(F-test) 141.00*** 141.74***
Countries
Aviral Kumar Tiwari and Mihai Mutascu

23 23 23 23 23 23 23 23
included
Total panel
529 529 529 529 529 529 529 529
observations
Notes:
1. The Hausman test has χ2 distribution and tests the null hypothesis that unobservable individual effects are not correlated with the explanatory variables, against the null
hypothesis of correlation between unobservable individual effects and the explanatory variables.
2. The Wald test has χ2 distribution and tests the null hypothesis of insignificance as a whole of the parameters of the explanatory variables, against the alternative hypothesis
of significance as a whole of the parameters of the explanatory variables.
3. The F-test has normal distribution N(0,1) and tests the null hypothesis of insignificance as a whole of the estimated parameters, against the alternative hypothesis of
significance as a whole of the estimated parameters.
4. ***, **, and *denote significance at 1, 5 and 10 % level of significance, respectively.
5. EF, CS, SD denotes fixed-effect, cross-section and standard deviation, respectively.
6. [----] denotes results are not computed.
7. @ denotes that model is estimated with Panel EGLS (Cross-section SUR) method.

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Source: Author’s calculation
 Economic Growth and FDI in Asia: A Panel-Data Approach

case also suggests that the random-effect model is the preferred way of analysis. So, from the
results of model 4, we can say that FDI and its higher inflow in the group of panel countries,
contribute to higher growth.
In addition, we have analysed another model in which random effect is present but we
have fixed period-specific effects, and results are reported under model 5. Model 5 reports
that exports and high level of FDI will increase the growth, otherwise FDI decreases growth
of the panel countries.
We also analyze the random-effect model by assuming the period-specific effect which
is also random (we call it the two-way random-effect model) and we report the results under
model 6. We find that in this case FDI, square of FDI, exports and labour force, are all found to
have positive impact on the economic growth in the panel of countries. Further, by providing
cross-section weights in the two-way random-effect model we find that results reported by
model 5 are robust to the inclusion of cross-section weights.
In the final step, in model 7, we used a random-effect model with the presence of a first-
order autoregressive scheme. The results of model 7 reveal that higher inflows of FDI, exports,
and capital have positive and significant effect on the economic growth of our panel countries.
Further, we have proceeded to analyse the nonlinear impact of exports in the panel countries.
Results of nonlinear impact analysis of exports are presented in Table 2.
In Table 2, the results of the Hausman test show that the random-effect model is an
appropriate test for the analysis. The results of this model are reported under model 2. It is
evident from model 2 that FDI, exports, squared exports and labour force have positive and
significant impact on the economic growth of the panel countries. It also implies that when we
analyse the nonlinearity in both cases i.e., exports and FDI, we find a significant and positive
impact of exports only on the economic growth of panel countries. This also suggests the
preference of the export-led growth hypothesis against the FDI-led growth hypothesis (a long
debated topic) in our panel countries.7
Further, we have analyzed a model of random effect in which the period-specific effect is
assumed fixed and results are reported under model 3. We find very surprising results from
model 3. In this case, exports and FDI are significant with a negative coefficient, while the
coefficients of the square of exports and FDI are significant with a positive sign. Further, if
we compare the coefficient of exports and FDI, we find that the negative impact of FDI is
much higher with respect to the negative impact of exports. Similarly, the positive impact of
the square of FDI is also much higher vis-à-vis the positive impact of the square of exports.
In the final step, we have analysed a model of two-way random effect and results are
reported under model 4. The two-way random-effect model confirms the findings of the one-
way random-effect model, model 2; i.e., FDI, exports, squared exports and labour force have
positive and significant impact on the economic growth of the panel countries.

7 It is important to mention here that our findings are subject to the inability to isolate the effects of FDI and
exports on GDP of Asian countries. As such, there is a possibility that FDI inflow might bring new and
advanced technologies which might, in turn, generate the momentum of exports, and hence, enhance the
growth process. However, we have been able to provide a feel for this kind of situation. Further, we offer a
new area of research to advanced econometricians, to develop a model wherein the isolated impact of FDI,
exports and imports, can be assessed in a general equilibrium framework. As in any economy, these variables
are very interrelated, and to isolate their interaction calls for more advanced research.

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Table 2: Regression Results of Nonlinearity in Exports

Panel data Models: Dependent variable GDP per capita
Independent Model 1 Model 2 Model 3 Model 4
variables
FE RE RE-CS: PR-FE Two way RE
FDI 90.66116*** 84.65257*** -64.73769** 86.23439***
(32.13013) (32.04871) (30.15429) (32.41097)
D(FDI) -69.82115*** -71.3812*** -19.63233 -71.22707***
(23.49202) (23.47128) (21.29783) (23.72556)
FDI*FDI 0.662905 0.92136 2.956818** 0.865526
(1.522143) (1.519276) (1.348565) (1.536169)
D(FDI)*D(FDI) -1.697746 -1.80206 -0.294891 -1.784594
(1.361054) (1.358522) (1.219316) (1.373612)
X 36.65306*** 48.8254*** -18.52868* 46.82782***
(10.28711) (9.735619) (10.06416) (9.941920)
D(X) -19.87041* -22.5239* 4.93891 -22.09097*
(12.01144) (11.98448) (11.26523)3 (12.11730)
X*X 0.22597*** 0.189938** 0.351105*** 0.195362***
(0.052021) (0.050768) (0.04656) (0.051541)
D(X)*D(X) -0.462805 -0.32252 -0.16019 -0.344878
(0.80232) (0.800911) (0.716786) (0.809725)
LF 1.63E-05*** 6.05E-06** -2.04E-06 7.57E-06**
(3.93E-06) (2.78E-06) (2.68E-06) (3.01E-06)
GCF -9.316265 -5.27927 -13.26655 -6.049611
(11.29417) (11.22916) (10.51317) (11.36353)
C 2994.27*** 3102.64*** 6568.13*** 3097.551***
(397.6006) (729.7422) (425.9144) (828.3446)
Model summary
R2 0.949444 0.478494 0.622246 0.479487
F- test 277.59*** 45.42*** 25.187*** 45.60***
Hausman test 17.65**
Fixed effect F(22, 473) =
(F-test) 144.04***
Cross-sections 23 23 23 23
included
Total panel 529 529 529 529
observations
Notes:
1. The Hausman test has χ2 distribution and tests the null hypothesis that unobservable individual effects are
not correlated with the explanatory variables, against the null hypothesis of correlation between unobservable
individual effects and the explanatory variables.
2. The Wald test has χ2 distribution and tests the null hypothesis of insignificance as a whole of the parameters
of the explanatory variables, against the alternative hypothesis of significance as a whole of the parameters of
the explanatory variables.
3. The F-test has normal distribution N(0,1) and tests the null hypothesis of insignificance as a whole of the
estimated parameters, against the alternative hypothesis of significance as a whole of the estimated parameters.
4. ***, **, and *denote significance at 1, 5 and 10 % level of significance, respectively.
5. EF, CS, SD denotes fixed-effect, cross-section and standard deviation, respectively.
Source: Author’s calculation

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V. Conclusions
There has been a long debate among policy makers and economists at the national and
international levels about whether FDI enhances growth in the host countries. Further, we
also analysed whether dependence on export-led growth or FDI lead-growth is preferable and
what is the evidence of nonlinearities associated with FDI and exports in economic growth.
In this study, we have attempted to answer these questions. We conducted an empirical
analysis in the framework of a panel for 23 Asian countries by employing data from 1986
to 2008. We also incorporated a two-way effect model for the analysis, as the assumptions
of fixed and random effects across countries and over time are extremely plausible. We also
examined nonlinearities associated with exports and FDI in the economic growth of Asian
countries. Further, as we have studied a large sample of Asian countries, we tried to minimise
the country-specific heterogeneity by imposing two-way dummies, i.e., in case of two-way
fixed- and random-effect models by using time-country dummies. We have also checked the
robustness of our results by analysing different models. However, by imposing dummies of
cultural aspects and religion we might have gotten more robust results, and an extended study
in this area should incorporate these issues. There are studies which have found that cultural
and religion aspects of a country have considerable impact on the economic growth on the
respective countries (see, for example, Dieckmann 1996, Griffin 1999, Casson and Godley
2000, Marini 2004, Grier 1997, Blum and Dudley 2001 and Barro and McCleary 2003).
The results of our analysis show that FDI and exports enhance the growth of Asian countries
and also that labour and capital help in that process. This implies that Asian countries that are
moving ahead for globalization might choose to go ahead. However, when we analyzed the
case of nonlinearity associated only with FDI, we find that this variable enhances growth. On
the other hand, the investigation of the nonlinearity in both cases, i.e., exports and FDI, show
a significant and positive impact of exports only on the economic growth of panel countries.
This suggests that to achieve a higher and higher growth path, moving ahead with exports
is more feasible in Asian countries. This is true, particularly for countries that do not have
sufficient resources to bring more advanced technology to private homes. The more advanced
technology would create an attractive environment for FDI, but would also require an extensive
investment for large improvements in the country’s infrastructure.
Further, there are studies that have found that FDI has a negative impact on economic
growth and income distribution. Hence, we suggest an export-led growth path, particularly at
the initial stage of growth, in the later period, dependence on FDI might be feasible option.
This finding can be defended based on two arguments (see Afzal 2010). First, the exports-
promotion incentives determine a specialization of the economy accompanied by the scale
benefices. Second, the augmented exports may stimulate the country to import high-value
inputs, products and technologies. By consequence, these elements may have a positive impact
on the productive capacity of the economy.

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Appendix
List of Analysed Countries
No. Country No. Country
1 Bahrain 13 Oman
2 Bangladesh 14 Pakistan
3 China 15 Philippines
4 China HK 16 Qatar
5 India 17 Saudi Arabia
6 Iran 18 Sri Lanka
7 Jordan 19 Syria
8 Korea Republic 20 Thailand
9 Kuwait 21 Turkey
10 Lebanon 22 United Arab Emirates
11 Malaysia 23 Vietnam
12 Myanmar

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