Premium Essay

Analyzing the Impact of Fdi on Inflation of the Nafta Countries Using Fixed Effects

In: Social Issues

Submitted By hasanmobarok
Words 549
Pages 3
Analyzing the impact of FDI on Inflation of the NAFTA Countries using Fixed Effects Model and Random Effect Model
Objective of this study is to examine the impact of foreign direct investment on the inflation of the NAFTA countries (United States, Canada and Mexico). To conduct the analysis we have developed a panel data set consisting of FDI and inflation data of all three countries from 1988 to 2014. One important aspect of this analysis is test the notion that unobservable factors that might simultaneously affect the left hand side and right hand side of the regression are time-invariant.
To test this, we need to use Fixed Effects (F-E) model and Random Effects (R-E) model. We used STATA for necessary analysis. Results are presented below:
Simple OLS regression (see Table-1) tells us that for NAFTA countries, FDI and inflation is negatively correlated and statistically significant. The estimated coefficient of -.0000251 indicates that for 1 dollar increase in FDI, inflation is expected to decrease by .0000251%, ceteris paribus.
The data set has been estimated by both 1) least squares dummy variable (LSDV) estimator. 2) Fixed effects estimator. The LSDV (see Table-2) fits the data better than does the pooled OLS. The F statistic increased from 5.05 to 10.21 (p<0000); SSE (sum of squares due to error or residual) decreased from .633356331 to .482044733; and R2 increased from 0.0601 to 0.2846. Due to the dummies included, this model loses two degrees of freedom (from 79 to 77). Parameter estimates is different from those in the pooled OLS. Under LSDV, FDI is no more a significant estimator of inflation.
Fixed-effects regression (see Table-3) provides us P value of 0.4669 and F value of 0.53, which lead us to the acceptance of the null hypothesis that three dummy parameters in LSDV are zero (e.g., μ1=0, μ2=0, μ3=0). The intra-class correlation measurement…...

Similar Documents

Premium Essay

Fdi Least Developed Country

...Foreign direct investment in least developed countries (LCD’S): Some 850 million people, or 12 per cent of the world’s population, live in the 48 least developed countries (LDCs). These countries are the world’s poorest, with per capita GDP under $1,086,and with low levels of capital, human assets, exports and technological development. The Programme of Action of the Least Developed Countries for the Decade 2001-2010 adopted at the Third United Nations Conference of the Least Developed Countries in 2001 in Brussels stated that foreign direct investment (FDI) was an important source of capital formation, know-how, employment generation and trade opportunities for LDCs and called for accelerating FDI inflows into these countries. Since 2001, both LDC governments and their development partners have indeed pursued proactive FDI promotion policies. Although there was an abrupt interruption of the secular trend in 2009, FDI flows to LDCs grew at an annual rate of 15 per cent during 2001-2010 as a whole to reach an estimated $24 billion by 2010, compared with $7.1 billion in 2001, and their share in global FDI flows rose from 0.9 per cent to over 2 per cent. The Brussels Declaration contained 30 international development goals for LDCs, including the attainment of an investment to GDP ratio of 25 per cent and an annual GDP growth rate of at least 7 per cent in order to achieve sustainable development and poverty reduction in LDCs. The Brussels goal of 7 per cent growth is......

Words: 4486 - Pages: 18

Premium Essay

Effect of Fdi on Bilateral Trade

...Effect of FDI on Bilateral Trade Abstract Contemporary literature refers to trade and Foreign Direct Investment (FDI) as alternative strategies. The debate is mainly between two notions: (1) that FDI displaces trade, and (2) that FDI and trade complement each other. Literature on FDI talks about the effect of foreign investments on trade. Lipsey (2002) mentions that outward FDI may decrease or increase (or have no effect on) exports of home country. These effects depend largely on the competitiveness of the host country and the motives behind investment by the home country in the host country. This paper is aimed at studying the effect of FDI on bilateral trade as well as effect at the aggregate level especially in the developed-developing nation paradigm. Introduction Literature suggests that there are a number of motives on which FDI takes place across nations. Most of the firms in the developed countries will go for foreign investment once they fulfill their domestic market and they in order to grow will go to foreign market. In this case the main motive of a firm is to tap new markets. This entry of one firm in to a foreign market will create a bandwagon effect thorough which their competitors will also enter that market. Again, when the competition sets in the foreign market, companies will be forced to take cost reduction measures to achieve higher profits will look for other destinations which have lower cost of production and thus the motive will become efficiency...

Words: 4808 - Pages: 20

Premium Essay

Impacts of Fdi to Developing Countries

...Direct Investments (FDIs) have been found to be important aspects of economic development of host countries, and crucial, in building technological capabilities of local companies in developing countries. It is a channel for international diffusion of technology, having the potential to transfer technological, organizational and managerial practices to developing countries, which may, in the long run, lead to higher technological capabilities, and innovation, resulting in economic growth in these countries. For Tanzania specifically, FDI is a type of investment which is relatively infant as the government had opted for a socialist path of economic development from 1967 to around mid 1980s, following the Arusha Declaration. In mid 1980s, the government initiated and implemented deliberate economic liberalization policies. These resulted into the rise of FDI in Tanzania. For instance, FDI inflows increased from USD 2,418.7 million in 1999 to USD 3,776.6 million in 2001. Such investments were concentrated in the sectors of manufacturing (33.4%), mining and quarrying (28%) as well as agricultural (6.7%) (TIC, BoT and NBS, 2004: 23-24)4. 2.2 Foreign Direct Investment (FDI): Definition and Characteristics 2.2.1 Defining FDI Several FDI definitions have been given in the literature and these are more or less similar. A more representative definition of FDI is that by Rutherford (1992: 178; 1995: 178-179) who defines FDI as business investment in another country, which......

Words: 9368 - Pages: 38

Premium Essay

Fdi in Develoved Countries

...1 Attracting Foreign Direct Investment (FDI) to India Ramkishen S. Rajana, Sunil Rongalab and Ramya Ghoshc April 2008 --------------------------a) George Mason University, Virginia, USA. E-mail: . b) International Professional Services Organization, Hyderabad, India. E-mail: c) Claremont Graduate University, California, USA. Email: We thank Rajeev Ranjan Chaturvedy for useful research assistance. The usual disclaimer applies. 2 1. Introduction Economic policymakers in most countries go out of their way to attract foreign direct investment (FDI). A high level of FDI inflows is an affirmation of the economic policies that the policymakers have been implementing as well as a stamp of approval of the future economic health of that particular country. There is clearly an intense global competition for FDI. India, for its part, has set up the “India Brand Equity Foundation” to try and attract that elusive FDI dollar. According to UNCTAD (2007), India has emerged as the second most attractive destination for FDI after China and ahead of the US, Russia and Brazil. While India has experienced a marked rise in FDI inflows in the last few years (doubling from an average of US$5-6 billion the previous three years to around US$ 19 billion in 2006-07) (Figure 1), it still receives far less FDI flows than China or much smaller economies in Asia like Hong Kong and Singapore was ahead of India (Figure 2). Not...

Words: 9792 - Pages: 40

Premium Essay

Impact of Fdi on Exports

...Table of Contents INTRODUCTION 2 LITERATURE REVIEW 3 FOREIGN DIRECT INVESTMENT 5 MAJOR IMPACTS OF FDI 8 EXPORTS 8 TREND IN EXPORT IN INDIA 9 MAJOR FACTORS THAT AFFECT EXPORTS 10 EXPORT TRENDS AND THE WAY AHEAD 12 IMPACT OF FDI ON EXPORT 12 HOW FDI DRIVES EXPORT 12 IMPACT ON SERVICE INDUSTRY 13 METHEDOLOGY 14 PERIOD OF STUDY 14 SOURCES OF DATA 14 HYPOTHESIS 14 RESULT 15 ANALYSIS 16 IMPLICATION 16 CONCLUSION 16 REFERENCES 18 EXHIBITS 20 FIGURES 23 INTRODUCTION Foreign direct investment is an important part of the economy of every country.It helps expedite the globalisation process. Firms across the world interact with other firms situated in different countries. This results in mutual growth of firms and states. Over the years FDI as a percentage of GDP of world has increased significantly. In 1980 the total stock of FDI equalled only 6.6 per cent of world gross domestic product, while in 2003 the share had increased to close to 23 per cent. This implies that the world economy is getting increasingly interconnected resulting into the flow of goods and capital into developing nations. India has seen tremendous growth in the FDI inflow over the past two decades. By 1997 India became the ninth largest recipient of such investment among the developing economies. Flow of capital and goods has impacted various macroeconomic variables of the economy. Export is one of the variables that gets affected due to the increase in FDI.It has......

Words: 5867 - Pages: 24

Free Essay

Negative Impact of Fdi

...I) NEGATIVE IMPACT 1. Exploit the workforce that is available in host country. Take undue advantage of low cost labors , unskilled labors…, make use of probation to consistently change labors without training or equipping them with experience, skill and qualification Because FDI enterprises in Vietnam are mainly conducted labor-intensive processes such as machining and assembly. Even the leading technology companies such as Intel Inside Sam Sung that have production facilities in Vietnam mainly produced components, as inputs to the process of creating a product in another country. Besides, a number of investment projects of China, one of the major partners of Vietnam, often use Chinese labor instead of hiring workers from VN 2. There is little technology transfer and management skill transfer into Viet Nam. Even Viet Nam becomes an industrial garbage after adopting out of date technologies. Investors tend to keep their “know- how” in secret. Channel 1: At a conference to summarize 25 years of new FDI was organized, Deputy Minister of Planning and Investment said Dao Quang Thu, 80% FDI technology used currently in Viet Nam is average, 5 6 % used is high-tech, 14% low and backward, there are individual cases using outdated technology. Technology transfer is mainly done horizontally - between business enterprises, with little change in the level and technological capacity. Despite the fact that there would be no corporations, they now carry the No. 1 technology,......

Words: 2763 - Pages: 12

Premium Essay

Fdi Develop Country

...The Truth is that Inward FDI can be good or bad depending on the economic structure/ system of the host country and how the macrieconomic environment is managed as well as how competitive are the markets in that economy. Foreign Direct Investments should rather be welcome and taken advantage of by both developing and developed countries to foster economic development and growth, absorb better technology and management tecchniques, lower cost of funds, better global exposure and improve international competitiveness. However, only for reasons of security and eliminate money lundering strict vigil on the sources of foreign investment should be checked, there should not be over-dependence on FDI (% of FDI to total domestically financed investment should not be very high and should decline to a lower limit as the economy develops, and FDI should be encouraged to remove domestic monopolies and foster competion in all markets. In the book "Does Foreign Direct Investment Promote Development?" edited by Theodore H. Moran, Edward M. Graham, and Magnus Blomström, (ISBN paper 0-88132-381-0 • May 2005 • 440 pp • $28.95), one can get the latest empirical research on the subject. Studies of the linkage between foreign direct investment and development have produced confusingand sometimes contradictory results. Some have shown that foreign direct investment (FDI) spurs economic growth in the host countries; others show no such effect. Some find spillover benefits to the host economy—that......

Words: 850 - Pages: 4

Premium Essay

Impacts of Fdi on Idustrial Dwvwlopment of Bd

...1.0 Introduction FDI refers to is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in the country. Foreign Direct Investment which is a passive investment which is passive investment in the securities of another country as stock and bonds. Foreign direct investment occurs when a firm invests directly in facilities to produce and /or market a product in a foreign country.FDI plays a dominant role in the economics of Bangladesh through accelerating Gross Domestic Product(GDP),export and domestic investment followed by overall economic growth. The objective of this term paper is to find out the major effect of FDI on industrial productivity of Bangladesh. Foreign direct investment (FDI) enables a capital poor country like Bangladesh to build up capital, avoid threat to unemployment develop productive capacity. Conventional wisdoms have it that firms with foreign equity tend to be more productive. This could be due to the firm specific tangible assets such as exclusive technology and product designs, or the intangible know-how embodied in foreign equity such as marketing, networking and sourcing. Such assets may be more readily available in big multinational corporations (MNC). As such, being part of MNCs allow the local subsidiaries with foreign equity to gain access to these......

Words: 6167 - Pages: 25

Premium Essay

Impact of Nafta on Us, Mexico and Canada

...Trade Agreement? Which sectors would you expect to gain most from this agreement? NAFTA allowed for the free flow of goods and services between the three parties, US, Mexico and Canada by immediate or phased elimination of tariffs on numerous goods. This free trade would in turn lead to comparative advantage i.e. each country could specialize in producing goods/ services in which they are relatively more productive than their trading partners, increasing overall productivity and output. Hence, the parties to NAFTA signed the agreement so that companies can leverage aggregating and arbitration opportunities within the region leading to overall more trade, more jobs and higher GDP. On the side, the countries also hoped for some other interrelated non-economic benefits such as reduction in illegal immigrants from Mexico to US due to availability of more earning opportunities within Mexico. The sectors which were expected to gain most from this agreement were- automobiles (in Canada), textile and apparel (in Mexico), agriculture (in all countries, particularly US), financial and banking services (in US) and energy (especially in US and Canada). 2.!Has NAFTA been beneficial for the countries that signed it? There were numerous positive economic developments after the signing of NAFTA such as: •! Increase in international trade: Mexico’s trade as a % of GDP almost doubled after the NAFTA agreement, new trade was generated due to arbitrage opportunities in......

Words: 1064 - Pages: 5

Premium Essay

Effects of Inflation

...respectively report inflation over time and the information on the money supply updated weekly. OUTLINE 1. Statement of Purpose- The effects of inflation on interest rates and investment returns. a. Inflation defined. Presentation of data of average inflation for every decade since the 1950’s b. Discuss which decade had the highest inflation and which had the lowest. 2. Purchasing power and how inflation affects purchasing power a. Purchasing power defined. b. Looking at the basket of goods that determine the Consumer Price Index. Taking a look at what those things cost today versus what they cost in 1979 (my birth year) adjusted for inflation. 3. Inflation’s effects on investment returns and interest rates. a. Adjusted value versus inflation adjusted value. b. What happens to the difference between these two values when; i. Inflation increases ii. The investment horizon lengthens iii. Expected returns increase 4. Measurement of inflation and usual government reactions to inflation. a. Discussing the current CPI level. b. Actions the government takes when inflation is high or low. Conclusion- Restating key research findings on the effects of inflation. Offer insights gained on the effects of inflation and how investor may adjust their strategies. Further, the effects of inflation on households in terms of loans, purchasing, and personal investments (retirement). Inflation is defined as......

Words: 3083 - Pages: 13

Premium Essay

Effect of Fdi by Mncs in Developing Countries

...Effects of FDI by MNCs in Developing Countries What are Multinational corporations? What motives do they have for foreign direct investment? This paper explores these questions and seeks to find explanations by exploring key economic theories. The impact of FDI on developing nations is discussed with analysis and evaluation of the positive and negative effects. The findings of this essay are that FDI is neither entirely good nor bad for a country. Instead its effects vary and depend on a number of factors. Whilst firms have different strategies and objectives, the aim is ultimately to gain profits. In some instances this comes at the detriment of the welfare in the host nations, but it can also have benefits for these developing countries. | Introduction Foreign direct investment (FDI) has played an important role in developing countries with these nations receiving an increasing share of world FDI inflows (see Fig.1 below). From 1985 to 1990, the FDI inflow into developing nations was 17.4% of the total global flow. This increased to 31-40% in the four years leading up to the financial crisis (Hill, 2014). FDI acts as a major contributor to capital formation in developing countries and can promote growth and sustainable development. However, there are many challenges that the host country can face when dealing with multinational corporations (MNCs). By looking at key issues and analysing empirical evidence, the positive and negative effects that foreign direct......

Words: 2715 - Pages: 11

Premium Essay

Impacts of Fdi

...IMPACTS OF FOREIGN DIRECT INVESTMENT (FDI) Resource Transfer a) Capital Inflow Multinational companies that are able to do FDI usually have big funds. This might be because big multinational companies have good reputation to get loan from bank, compared to the local companies. With the inflow of capital into the host country, it will help the state to build better infrastructure, develop competitiveness in the industry, and boost the economy. b) Technology Transfer In any nation, the importance of technology is very important as it transfers to the growth of economy. Whenever FDI takes place, technology is transferred from the home country to the host country. It may be in form of machine transfer or knowledge transfer. For example in Malaysia, Proton collaborates with Lotus, and the technology of manufacturing car is transferred although it is not 100%. The vehicle manufacturing technology also help other Malaysian industry like rubber industry in making tires. c) Managerial Skills Transfer Management know-how is required through FDI process gives important benefit to the host county. Local employees hired by MNC are exposed to latest management skills that will improve the efficiency of operations in the host country. When foreign managers leave the firm, the trained local personnel will help to build indigenous firms, causing a beneficial spin-off effect to the host country. Employment Effect FDI brings more beneficial employment prospects to the host......

Words: 544 - Pages: 3

Premium Essay

Effects of Inflation The effect of inflation is not distributed evenly, and as a consequence there are hidden costs to some and benefits to others from this decrease in purchasing power. For example, with inflation lenders or depositors who are paid a fixed rate of interest on loans or deposits will lose purchasing power from their interest earnings, while their borrowers benefit. Individuals or institutions with cash assets will experience a decline in the purchasing power of their holdings. Increases in payments to workers and pensioners often lag behind inflation, especially for those with fixed payments. High or unpredictable inflation rates are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation.Uncertainty about the future purchasing power of money discourages investment and saving. And inflation can impose hidden tax increases, as inflated earnings push taxpayers into higher income tax rates. With high inflation, purchasing power is redistributed from those on fixed incomes such as pensioners towards those with variable incomes whose earnings may better keep pace with the inflation. This redistribution of purchasing power will also occur between international trading partners. Where fixed exchange......

Words: 306 - Pages: 2

Premium Essay

Inflation and Its Impact

...Title Page From Inflation to More Inflation, Disinflation and Low Inflation By Allan H. Meltzer The Allan H. Meltzer University Professor of Political Economy, Carnegie Mellon University and Visiting Scholar, American Enterprise Institute Keynote Address, Conference on Price Stability Federal Reserve Bank of Chicago Thursday, November 3, 2005 From Inflation to Disinflation and Low Inflation By Allan H. Meltzer Volume 2 of A History of the Federal Reserve covers mainly the years of inflation and disinflation, followed by a return to what is now regarded as relatively low inflation. It treats four questions: Why did inflation start? Why did it continue for 15 or more years, from 1965 to about 1982? Why did it end? Why did it not return? In this paper, I give an overview of the material that I consider in much greater detail in my book. As we look back to the 1950s and 1960s from the early 21st century, two of the many changes in the Federal Reserve System affecting inflation deserve comment. First, in the 1950s the goal was price stability, zero reported inflation, not inflation of about two percent. The 1959-60 disinflation brought reported cpi inflation, measured as a 12-month moving average, to less than 1 percent from March through August 1959. This measure again was below 1 percent through most of 1961, and it did not reach 2 percent until early 1966. Properly measured and adjusted for biases in the price index, the true price level......

Words: 4732 - Pages: 19

Premium Essay

Effects of Inflation on Performance Microfinance Institutions

...(mortis 2000). MFI have therefore been given great emphasis in recent times because they are considered as essential actors in achieving social and economic development in both developed and developing countries. Kenya with an estimated population of 29.6 million people and a per capita income of US $260 is categorized by the World Bank to be among the poorest countries in the world (world development report 1992). Kenya’s development challenge therefore remains in finding sustainable poverty eradication strategies. Micro and small enterprises have been seen as one of the strategies that can bring faster development. MFI does therefore play a big role in financing the micro and small enterprises for faster development. MFI’s enterprises are also highly rated for employment creation. They are therefore important in Kenya where unemployment and underemployment are estimated at between 25% and 35% respectively. MFI s’ through the provision of credit influence the type of technology adopted by entrepreneurs and even the rate of technology adoption. Small scale enterprises in the agricultural sector play a big role in providing food, income generation and employment creation. The application of technology is vital in enhancing growth and development of these enterprises. Inflation is vital in the growth and development of any MFI. Both large scale and small scale MFI depend on financial organizations for credit in order to raise capital and also finance any development......

Words: 13682 - Pages: 55