Foreign Direct Investment, Exports, and Economic Growth in Malaysia, Thailand and Vietnam

UNIVERSITY OF ECONOMICS

INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY

THE HAGUE
THE NETHERLANDS

VIETNAM

VIETNAM- NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

FOREIGN DIRECT INVESTMENT, EXPORTS,
AND ECONOMIC GROWTH IN MALAYSIA,
THAILAND, AND VIETNAM

A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

BUI THI KIM HOANG

Academic Supervisor:

DR. NGUYEN HOANG BAO

HO CHI MINH CITY, DECEMBER 2012

Certification

"I certificate that the substance of the thesis has not already been submitted for any
degree and is not currently submitted for any other degree.
I certify that to the best of my knowledge and help received in preparing the thesis
and all sources used have been acknowledged in the thesis."
Signature

Bui Thi Kim Hoang
Date: ................................. .


Acknowledgement

First of all, I would like express my deepest gratitude my academic supervisor, Dr.
Nguyen Hoang Bao, Dean of Economic Development, HCM City University of
Economics, for advice, critical, and helpful comments on the paper.
My dearest thanks to the lectures and staff of the project, who helped improve my
knowledge and fulfill the programme.
I am deeply indebted to my parents, my elder brother and my husband for their love
and support of me, keeping me in good condition for learning.
And finally, I am also grateful to my close friends for their warm encourgagement.

ii


Abstract
This study exammes the causality relations between foreign direct
investment, exports, and economic growth in the three countries including

Malaysia, Thailand, and Vietnam of the Southeast region for the period of 19892010. The paper uses time series data for individual countries and panel data for the
panel three countries. The study estimate vector autoregression model (VAR) or
vector error correction model (VECM) of the three variables to find Granger causal
relationship for each of the three countries. And then, using two different panel unit
root tests it is found that all the panel variables are integrated in order one. The
cointegration is found for the panel variables from the Johansen Fisher panel
cointegration and Kao tests. The panel-Granger test support that there are
bidirectional long run causal relations between the variables but there is only
unidirectional from exports to foreign direct investment in the short run for the
panel of three countries.

iii


Contents
Certification ............................................................................................................... 1
Acknowledgement ................................................................................................... ii
Abstract ...... ................ ...................................................................................... ...... iii
Contents ................................................................................................................. iv
List of Tables .......................................................................................................... vi
List of Figures ......................................................................................................... vii
List of Abbreviations .............................................................................................. viii
Chapter 1: Introduction ........................................................................................... 1
1.1 Problem statement ........................................................................................... 1
1.2 Research objectives ......................................................................................... 3
1.3 Research questions .......................................................................................... 4
1.4 Research methodology .................................................................................... 4
1.5 Structure of the thesis ...................................................................................... 4
Chapter 2: Literature Review ................................................................................. 5
2.1 Theoretical Literature ...................................................................................... 5

2.1.1 Relationship between foreign direct investment and economic growth .... 5
2.1.2 Relationship between exports and economic growth ................................ 6
2.1.3 Relationship between FDI and exports ...................................................... 8
2.2 Empirical studies ............................................................................................ 9
2.3 Conceptual framework .................................................................................. 17
Chapter 3: Foreign Direct Investment, exports, and economic growth in
Malaysia, Thailand, and Vietnam: Descriptive and Comparative Analysis ..... 19
3 .1 Foreign direct investment, exports, and economic growth in Malaysia ....... 19
and Thailand .......................................................................................................... 19
3.2 Foreign direct investment, exports, and economic growth in Vietnam ........ 26
Chapter 4: Research Methodology ....................................................................... 40
4.1 Data sources .................................................................................................. 40
4.2 Model Specification ...................................................................................... 40
4.3 , Estimation techniques .................................................................................... 41
4.3.1 Individual economy's Granger causality test .......................................... 41
4.3 .1.1 Unit root tests for stationary time series ............................................ 41
4.3.1.2 Johansen cointegration technique ....................................................... 43
4.3.1.3 Granger causality analysis .................................................................. 45
4.3.2 Panel data Granger causality test.. ............................................................ 46
4.3 .2.1 Panel unit root tests ............................................................................ 4 7

iv


4.3.2.2 Panel cointegration test ...................................................................... 49
4.3.2.3 Panel causality test ............................................................................. 50
Chapter 5. Empirical Results ................................................................................ 51
5.1 Unit root tests ................................................................................................ 51
5.2 Cointegration analysis ................................................................................... 53
Chapter 6: Major Findings and Policy Implications .......................................... 58

6.1 Major findings ............................................................................................... 58
6.2 Policy implications ........................................................................................ 60
6.3 Research limitations ...................................................................................... 60
References ................................................................................................................ 62
Appendices .............................................................................................................. 69

v


List of Tables
Table 2.1: Summary of empirical studies on causality between FDI, exports, and
economic growth ........................................................................................................... 16
Table 3.1: The contribution of components of total demand to economic growth in
Malaysia and Thailand, 1989-2010 (percentage) .......................................................... 20
Table 3.2: Correlation between the growth rates ofthe real GDP and its components in
Malaysia and Thailand, 1989-2010 ............................................................................... 21
Table 3.3: Structural change in Malaysia and Thailand, 1989-2010 ............................. 25
Table 3.4: The contribution of components of total demand to economic growth in
Vietnam (percentage) .................................................................................................... 27
Table 3.5: Correlation between the growth rates of the real GDP and its components in
Vietnam, 1989-2010 ...................................................................................................... 27
Table 3.6: GDP growth

(g=~Y/Y),

Rate of investment (I/Y),

~Y/I,

ICOR in Vietnam28

Table 3.7: Structural change in Vietnam, 1989-2010 (percentage) .............................. 29
Table 3.8: Exports and Imports in Vietnam (percentage ofGDP) ................................ 30
Table 3.9: Export value index in Vietnam, 1989-2010 ................................................. 31
Table 3.10: Foreign direct investment inflows by Vietnam's region and province ...... 34
Table 3.11: Foreign Direct Investment by sector in Vietnam ....................................... 35
Table 3.12: FDI in industry for Vietnam country .......................................................... 36
Table 3.13: Exports by foreign investment sector in Vietnam ...................................... 37
Table 5.1: ADF and PP unit root tests on level series for the individuals ..................... 51
Table 5.2: ADF and PP unit root tests on the first difference series for the individuals 52
Table 5.3: Panel unit root tests ...................................................................................... 53
Table 5.4: Results of Johansen cointegration test for individual country ..................... 54
Table 5.5: Panel cointegration test ................................................................................ 54
Table 5.6: Granger causality test based on VECM for Thailand and Vietnam ............. 55
Table 5.7: Granger causality test based on VAR model for Malaysia .......................... 56
Table 5.8: Panel Granger results ................................................................................... 56
Table 5.9: The causality relations in this paper ............................................................. 57

vi


List of Figures
Figure 2.1: Conceptual framework in this study ...................................................... 18
Figure 3.1: GDP growth in Malaysia and Thailand, 1989-2010 (percentage) ......... 19
Figure 3.2: Real GDP, Exports and FDI in Malaysia and Thailand ($US) .............. 21
Figure 3.3: The contribution ofFDI inflows in GDP in Malaysia and Thailand,
1989-2010 (percentage) ............................................................................................ 22
Figure 3.4: Export structure in Malaysia, 1989-2010 (percentage) ......................... 23
Figure 3.5: Export structure in Thailand, 1989-2010 (percentage) .......................... 24
Figure 3.6: Export price index in Malaysia and Thailand, 1989-2010 .................... 25

Figure 3.7: Vietnam GDP growth(%) ..................................................................... 26
Figure 3.8: GDP, exports and investment in Vietnam, 1989-2010 (VND billion) .. 29
Figure 3.9: The growth of exports in Vietnam, 1990-2010 (percentage) ................ 30
Figure 3.10: Export structure in Vietnam ................................................................. 32
Figure 3.11: FDI inflows in the Southeast countries ($US million) ........................ 32
Figure 3.12: Foreign direct investment in the period in Vietnam, 1989-2010 ......... 33
Figure 3.13: Foreign direct investment, exports and real GDP growth (%) ............ 3 8

vii


List of Abbreviations

ADF

Augmented Dickey-Fuller

AIC

Akaike's Information Criterion

AR

Autoregression

ECT

Error Correction Term

EX

Exports

FDI

Foreign Direct Investment

GDP (Y)

Gross Domestic Product

GMM

Generalized Method of Moment

I

Investment

ICOR

Incremental Capital-Output Ratio

IPS

Im, Pesaran, and Shin

MNCs

Multinational Coporations

MNEs

Multinational Enterprises

pp

Phillips and Perron

SIC

Schwarz's Information Criterion

US$

The United States dollar

VAR

Vector Autoregression

VECM

Vector Error Correction Model

VND

Vietnam dong

WB

World Bank

WTO

World Trade Organization

viii


Chapter 1: Introduction
This chapter explains the reason for the carrying out the thesis, its objectives,
and research questions. The methodology is also mentioned in this part. Finally, the
structure of the thesis will be presented.
1.1

Problem statement
The role foreign direct investment and exports in promoting economic

growth have much recognized in many countries in the world throughout theoretical
and empirical literature. The new growth theories have showed the importance of
investment and openness to trade in economic development. Through these factors,
the strategies for foreign direct investment and exports promotion are necessary
proposed to promote economic growth especially for developing countries, so
called 'FDI-led growth' or 'export-led growth'. Theoretically, international free
trade has been called "engine of growth", which is proved clearly from the classical
economists to the modem economists. Moreover, many economic studies have
indicated that countries adopt international free trade enjoy higher growth rates than
those close their economies to trade (Sachs and Warner, 1997; Wacziarg and
Welch, 2008). The application of an open economy and free trade, countries will be

rewarded greater economic growth and leads to raise income levels and living
standards (Frankel and Romer, 1999). As above, throughout trade, export sectors
can be earned more profit and increased saving as well as create foreign exchange
earnings and jobs opportunities for workers in export sector (Azam, 2010). Hence,
the output growth can be generated not only by increasing the quantities of labor
and capital in economy, but also by expanding exports. Furthermore, the
competitive of exports markets cause to give export-oriented policies contribute
positively to economic growth and it also helps the countries integrate promptly into
the world economy. Therefore, the export-led growth hypothesis is in favor of
exports expansion is one of the main determinants of economic growth. However,
output also has a positive impact on exports throughout productivity growth,

1


productivity improvement and cost reduction of products which lead to facilitate
exports (Krugman, 1984 ).
Beside exports, foreign direct investment also shows an upward trend and the
increase in foreign direct investment flows is expected to become the power for the
growth of trade and economic growth. FDI can promote the economic development
of the host country by helping to improve productivity growth and export
(UNCTAD, 2002). It has considered a tool for employment generation,
technological advancement, social welfare improvement, and poverty alleviation,
especially for the developing countries. Chiara and Sasidharan (2009) also showed
that FDI inflows have the important role in the process of economic development
because they bring in some specific technological assets that are not available in the
recipient country. In general, trade is considered also a vehicle for the transmission
of FDI flows such as capital, technological progress, and managerial skills.
Economic growth is boosted by FDI and it is more helpful for export promotion. In
summary, the relationship between foreign direct investment, exports, and

economic growth have gained importance and attention among policy makers and
researchers.
From the past to now, many economists and researchers have a great interest
in the relationship between FDI, exports, and economic growth. A larger number of
empirical studies have used time series, cross section, and panel data to investigate
the impact of FDI, exports on economic growth or the FDI-led growth and exportled growth hypothesis. The methods is applied to explore the relationship of exports
and economic growth in the early studies includes examining the simple correlation
coefficient between them (Balassa, 1978 and Tyler, 1981) or estimating regression
equations based on the Neoclassical growth with exports is an explanatory
variables. In the recent studies, the causality between FDI, exports growth, and
economic growth is emphasized by using cointegration techniques and Granger
causality for time series or panel data. Some empirical studies have used the
methods that is above mentioned to examine the causal link of FDI, exports, and

2


growth for Asian or Africa regions, developing countries and so on, for instance of
time series data, Ekanayake (1999), Ismaid and Harjito (2003), Bahmani-Oskooee
(2009), Sinoha-Lopete (2006), Pham (2008), Miankhel et al. (2009), Eusuf and
Ahmed (2010), Sun (2011), Awan et al. (2012) and for example for panel data,
Hsiao and Hsiao (2006), Won et al. (2008), Mehrara and Firouzjaee (20 11 ), Safdari
et al. (2011), Hossain (2012). The results indicate that the relation ofFDI, exports,
and economic growth rather mixed, it is specified for each of country or other
regions. So, it is necessary for policy makers and researchers to pay attention to
relation FDI, exports, and economic growth. These variables interact with each
other, for this reason, needing to clearly determine the relationship of them in order
to give effective policy to promote economic growth, especially for developing
countries in the world. Malaysia and Thailand are one of the few developing
countries that have sustained economic growth with high rate in the long run.

According to Todaro and Smith (2003), Malaysia and Thailand have been
successful in increasing exports and attracting foreign direct investment to enhance
economic growth, particularly in manufacturing sector. Vietnam also has
comparative advantage and economy conditions like Malaysia and Thailand, so the
policies which promote economic growth from these countries are the significant
lessons for national. Hence, this thesis examines the causal relationship between
FDI, exports, and economic growth using cointegration and causality techniques
for time series data and panel data from 1989 to 2010 in three countries including
Malaysia, Thailand, and Vietnam of Southeast Asia region where has many
countries in the stage of developing. It is expected that this paper will contribute
evidence to empirical literature with modem methodology.
1.2

Research objectives

The objectives are as follows:
•

To examine the causality relationship between foreign direct investment,
exports, and economic growth in these countries

3


•

To suggest appropriate measures for exports expansion and attracting FDI in
order to stimulate economic growth in these countries.

1.3

Research questions

In order to achieve the research objectives:
•

Is there a causal relationship between FDI, exports, and economic growth in
Malaysia, Thailand, and Vietnam countries?

•

What policy implications could help improve exports and environment for
FDI in these countries?

1.4

Research methodology

This paper uses annual time series data and panel data of three countries in
Southeast Asia region including Malaysia, Thailand, and Vietnam over the period
of 1989-2010.
To examine the relationship between FDI, exports, and economic growth,
statistic approach for time series data includes Augmented Dickey-Fuller (ADF) test
and the Phillips and Perron (PP) test, Johansen's cointegration technique, Granger
causality test and for panel data involves Im, Perasan, and Shin (IPS) test and
Augmented Dickey-Fuller Fisher (ADF-Fisher) test, Johansen Fisher panel
cointegration and Kao tests, panel Granger causality test are applied in this study.
1.5

Structure of the thesis

This thesis is divided into six chapters. Chapter 1 is the problem definition
that leads to the study, the thesis of objectives and research questions, and briefly
methodology. Chapter 2 presents theoretical and literature review. Chapter 3
introduces overview of the problem on foreign direct investment, exports, and
economic growth. Chapter 4 provides the methodology for carrying out the study.
Chapter 5 indicates empirical results corresponding to each estimation technique.
The last chapter will give conclusions of empirical results, policy implications, and
limitations of the thesis.

4


Chapter 2: Literature Review
The chapter firstly presents theoretical literature between foreign direct
investment and economic growth, exports and economic growth. Then, empirical
literature for the causal relationship between foreign direct investment, exports, and
economic growth is mentioned.
2.1

Theoretical Literature

2.1.1 Relationship between foreign direct investment and economic growth

Foreign direct investment is an important source of capital, complements
domestic private investment which is associated with new job opportunities and
enhancement of technology transfer leads to boost economic growth in host
countries. There are several ways in which FDI can contribute to economic growth.
In Neoclassical growth model considers technological progress and labor force as
exogenous, and thus FDI increases the volume of investment and promotes

economic growth. FDI inflow only has a short run growth effect, due to the
diminishing returns to capital. In the new endogenous growth theory consider long
run growth as a function of technological change, if FDI positively influences
technology, it can increase the rate of growth in the host economy through
technology transfer, spillover effects. FDI have a positive impact on economic
growth both in the short run and the long run (Herzer et al., 2006). Makki and
Somwaru (2004) also have pointed out that FDI has a significance through
technology transfer via diffusion process from developed to developing countries.
On the other hand, economic growth is one of the determinants of foreign
direct investment inflows in the host country. The level of economic growth plays
an important role in attracting FDI, the enhancement of economic growth may
create increase domestic markets and businesses (Agiomirgianakis et al., 2006).
Rapid economic growth leads to large aggregate demand which stimulates to
increase demand for investments including FDI. In addition, better economic
performances in the host countries also contribute incentive FDI through a better

5


infrastructural facilities and greater opportunities for making profits (Zhang, 2001 ).
Johnson (2006) state that FDI inflows enhance economic growth of a host country
and the growth of economic in tum may attract FDI inflows and the cycle
continues.
2.1.2 Relationship between exports and economic growth

As commonly perceived exports and economic growth can have correlation
each other and exports are a vital factor in promoting economic growth in
developing countries. There are several theoretical arguments supporting export-led
growth hypothesis.
The early study (Balassa, 1978) show that export growth positively affects

the growth of economic based on a relatively high correlation between them. In this
paper, export and domestic savings also have positively correlated and the
expansion of exports may attract lot of foreign capital, contribute to raise labor.
This paper provides evidence in favor of export-oriented policy for economic
growth. Tyler (1981) has the same point of view with Balassa, he examined the
relation of growth and export expansion using cross sectional data for 55
developing countries. He also found a strong positive relationship of growth and
exports through highly rank correlation between them. But the examination of
correlations does not indicate incorporating the effect of other variables. So, he
estimates a model based on Cobb-Douglas production function with three factors is
expressed as follows:

Where Xi is country i's GNP, A is a technological constant, Ki is country i's
capital stock services, Li is a country i' s labor force inputs and Ei is country i' s
exports.
This regression estimate made capital and exports play significant role in
contribute to growth compared to the model only have capital information and labor

6


force. And he proved that 17.5% increase in exports is associated with 1% increase
in growth. Consequently, this paper results indicate that exports take on an
important role in economic growth in developing countries.
Export orientation and export promotion are beneficial for both developed
and developing countries (Medina-Smith, 2001 ). He advocated that exports take
advantage of economies of scale and technological progress leads to increase
productivity and create employment. In addition, exports expansion decreases the
pressures of current account for foreign capital goods by increasing the country's
external earnings and attracting foreign investment. K6nya (2002) also argues that

the promotion of export activity leads to economic growth base on trade theory. It
directly encourages the production of goods for exports lead to the specialization of
economic of scale and the nation's comparative advantages.
Awokuse (2008) supports that export expansion is a vital factor for the
growth of output or leads to economic growth. Foreign demand is increase for the
exportable of domestic products implies that creating employment and improving
income for person which works in the exportable sector, it can cause to increase
output. Expanding exports can also make the efficient reallocation of resources and
the exploitation of scale economies that can produce greater productivity and output
growth.

Furthermore,

the

increased for

exports

can stimulate advanced

technologies, skill improvement and management techniques due to foreign market
competition (Ben David and Loewy, 1998) and provide foreign exchange to
increase the imports of capital goods and intermediate goods which enhances output
growth. The expansion of exports push up output growth while at the same time
output growth also stimulates exports. Exports create more employment and
income, leading to more productivity gains and ultimately to more exports.
Besides, there are also theoretical reasons to support the growth-led export.
Particularly, Neoclassical trade theory supports the idea that economic growth leads
to higher exports. Economies of scale contribute to cost reduction, comparative

7


advantage and hence exports increase. Moreover, economic growth enhances skills
and technology in the various sectors of an economy to boost productivity
(Krugman, 1984 ). This point of view similarly, Ram (2003) also state that the
advancement skills and technology create a comparative advantage for the country
in production of a number of products which can lead to expand exports for those
commodities. Majeed and Ahmad (2006) proved that GDP and GDP growth has
positive effects on exports with highly significant in developing countries.
Therefore, it is important to maintain a high and sustainable economic growth
which is a vital factor to promote exports because bidirectional causality between
exports and output growth can exist.
2.1.3 Relationship between FDI and exports

FDI is motivated mainly by the possibility of high profitability in growing
markets. FDI affects the host country's export performance through two ways
include the export activities of foreign affiliates or the expansion of exports by
domestically-owned firms (Lipsey, 2004). Firstly, MNC's affiliates have factor
endowments such as abundant resource or cheaper labor costs to increase export
competitiveness in the world markets and thus boosting export performance.
Secondly, the local firms' exports are indirectly affected by FDI through various
channels. MNCs affiliates may improve local firms' competitiveness through the
technology transfer, management, skills and labor lead to increase efficiency
production. Moreover, Njong (2008) also supported FDI shift from higher labor
cost countries to lower labor cost host countries leads to increase MNCs' export
competitiveness and enhance the export performance.
Besides, exports also effect on FDI through trade or various ways. According
to Akinkugbe (2003 ), the high income per capita, the orientation of outward to

international trade, infrastructure development and high rate of return on investment
are the significant factors for FDI inflows. Similarly, Lim (2004) found that the
market size, infrastructure quality, economic stability and free trade zone are

8


important for FDI and the investment decisions are affected by fiscal incentives,
investment environment, labor cost and trade openness.
2.2

Empirical studies

Babalola et al. (2012) studied the relationship among exports, FDI, and
economic growth in Nigeria during 1960-2009. The paper show that having six
cointegration vectors among FDI, capital formation, degree of openness, import,
and terms of trade based on the results of Johansen co integration test. The variables
had the relationship in long-run and played an important role in the economy in
Nigeria.
Javed et al. (2012) also examined the relationship among FDI, trade, and
economic growth in four South Asian countries India, Bangladesh, Sri Lanka and
Pakistan over the period of 1973-2010 using Generalized Method of Moment
(GMM). The results show that exports have positive impact on economic growth in
all nations and similarly for FDI but except Sri-Lanka. Besides, domestic
investment and labor force have also positive effect on economic growth.
Mangir (2012) used cointegration and Granger causality test to analyze the
relationship between export and economic growth in Turkey for the period of 2002
- 20 11 with quarterly time series data. Cointegration is found between export and
economic growth which these variables have long run relationship. Granger
causality test results show that there is a unidirectional causality relationship from

export to economic growth in the short run and bidirectional in the long run in
Turkey.
Hossain (2012) analyzed both the short-run and long-run relationship
between FDI and economic output in South Asian countries using data from 1972 to
2008. The study used three econometric model (ADF test, Engle-Granger test, and
VECM) and Granger causality to find the impact of FDI on economic output and
inverse. The results indicate that there is no cointegration between FDI and GDP in
the both short run and long run for Bangladesh and India. Nonetheless, the
cointegration is found in Pakistan in the short run as well as long run. There is no

9


causality relationship between FDI and GDP in Bangladesh and one way
relationship between two variables in Pakistan and India, and FDI cause economic
output in these countries.
Sun (20 11) examined relationship between FDI and economic growth in
China by a co integration approach over the period of 1985-2010. FDI and economic
growth is cointegrated based on cointegration test. Granger causality test shows that
China's economic growth makes FDI increase.
Erecakar (20 11) investigated the relationship among growth, FDI, trade and
inflation in Turkey for the period 1970-2008. Cointegration test also is used in this
study to explore the long-run relationship of variables and found out only one
cointegration vector exists among of them. Besides, the results indicated that FDI,
inflation and trade surplus have positive effect on economic growth.
Tekin (2011) explores Granger causality among real GDP, real Exports, and
inward FDI in Least Developing Countries during period 1990- 2009. The study
use a new panel - data approach based on SUR systems and Wald tests. The
Granger causality relationship is found among these variables. The empirical results
support export-led growth, FDI-led growth, FDI-led exports, inversely.

Safdari et al. (20 11) tested the causality relationship between export and
economic growth in Asian developing countries over from 1988 to 2008. A panel
data of thirteen countries and the variables of GDP and exports are measured in
constant 2000 US dollars with GDP deflator is applied in this paper. The study uses
four panel unit roots of Levin et al. (LLC, 2002), Im et al. (IPS, 2003), Breitung
(2000) and Fisher-type test by Maddala and Wu (1999), and Choi (200 1) to
investigate for stationary. Panel cointegration test proposed by Pedroni ( 1999, 2004)
and Kao ( 1999) is applied to check cointegration between export and output growth.
A panel-VECM causality based on Wald test is used for examine causal relation of
real export and real GDP. The results show that export is not Granger cause of
economic growth, but one way causality from growth to export in the thirteen Asian
developing countries is selected in this paper.

10


Eusuf and Ahmed (20 10) examined causality between export and growth
using Engle-Granger's error correction model with annual time series data in South
Asian countries. Seven countries with the different time period for each country is
studied in this paper including India (1965-2005), Nepal (1965-2005), Sri Lanka
(1965-2005), Pakistan (1965-2005), Bangladesh (1980-2005), Maldives (19802005) and Bhutan (1980-2004). The indices of the consumer price index, the unit
value index for exports and the GDP deflator have been used in this study. The
ADF and PP test is used for testing for stationary and Engle-Granger procedure is
checked long-run relationship between exports and growth. And the causality
relationship of two variables is tested basing on the F -test and the error correction
term. The results indicate that real exports and real GDP are cointegrated in
Bangladesh, Pakistan and Nepal. Export-led growth is found for Pakistan, Sri Lanka
and Bhutan both short term and long term while growth-led exports exist in India,
Nepal and Maldives. In the Bangladesh's case, the data had not proved the presence
of feed-back export-led growth relation. The study findings suggest mixed results,

and do not give any conclusion to support export-led growth for South Asian
countries.
Bahmani-Oskooee and Economidou (2009) investigated export-led growth
and growth-led exports using annual data over the period 1960-1999 from 61
countries of LDCs. The paper uses five variables gross domestic product, gross
capital formation, exports, imports (in constant 1995 US $) and total labor force in
thousands. For testing stationary of a variable and giving the number of
cointegration vectors uses Johansen's cointegration technique (1988). The results
show that no cointegration vector is found

for 14 countries (Cote d' Ivoire,

Mauritania, Mauritius, Morocco, China, Malaysia, Pakistan, the Philippines,
Guyana, Haiti, Jamaica, Paraguay, Peru, and Uruguay) and the null of no
cointegration is rejected in the remaining countries showing the existence of at least
one cointegrating vectors among these variables. The relationship between exports
and output is divided into four groups in this paper. The first, there is a feedback

11


between exports and output in the long run for Algeria, Gambia, Ghana, Malawi,
Senegal, Hungary, El Salvador, and Honduras. The second group includes countries
Burkina Faso, Burundi, Gabon, Kenya, Lesotho, Mali, Niger, Nigeria, Togo, India,
Korea, Thailand, Egypt, Israel, Argentina, Bolivia, Brazil, Costa Rica, Dominican
Republic, Guatemala, Mexico, Trinidad, and Tobago have no long run relation
between output and exports. The third group that the increasing of exports stimulate
output in the long run which is occurred in Congo, South Africa, Swaziland,
Tunisia, Ecuador, and Nicaragua. The finally group, having a one way relation from
output growth to export growth in the long run for Benin, Guinea, Bisu, Rwanda,

Zambia, Bangladesh, Indonesia, Papua New Guinea, Chile, and Colombia. Thus,
the results are country specific.
Rudra et al. (2009) study established cointegration and causality relationship,
both at the panel level and individual level, between FDI and economic growth of
five ASEAN countries, namely, Indonesia, Malaysia, Singapore, Philippines, and
Thailand over period 1970-2007. The results indicate that have cointegration
between FDI and economic growth for five countries have the presence of long run
relation between them at the panel level, but only had Singapore and Thailand at the
individual country level. Besides, bi-directional causality also has found between
two variables both two levels for all countries except Malaysia through Granger
causality.
Miankhel et al. (2009) explored the causal relationship between FDI, exports
and GDP in both the short run and long run for six emerging countries consist of
India, Pakistan, Malaysia, Thailand, Chile and Mexico during 1970-2005 periods.
ADF, PP, and Zivot and Andrews tests were employed to check for the stationary of
the variables with one structure break. The paper also used cointegration and
Granger causality based on VAR or VECM to examine the causal link between
these variables. The export-led growth hypothesis is supported in both India and
Pakistan. GDP growth also drives growth FDI in India and exports for the case of
Pakistan. In Mexico and Chile, exports are cause of FDI and output in the long run.

12


For the case of Thailand, bidirectional causality is found between GDP and FDI,
however, no causality relationship is found in Malaysia.
Baharom et al. (2008) study the impact of trade openness and FDI on
economic growth in Malaysia for the period of 1975- 2005. The analysis is based
on bounds testing approach by Pesaran et al. (200 1). The results show that the effect
of trade openness on growth is statistically significant positively, both in the short

run as the long run. FDI is positive effect on economic growth in the short run and
negatively in the long run.
Pham (2008) applied the structural VAR models to examine the effect of
investment or export on Vietnam's economic growth since the Renovation 'Doi
Moi' in 1986. The study used annual data from 1986 to 2007 with four variables
GDP, investment, export, and productivity. The results indicate that investment has
affected to economic growth and supported the investment-led growth but exportled growth did not support in Vietnam. In addition, export also did not contribute to
improve productivity as well as investment.
Maneschiold (2008) carried out a study investigated the export-led growth in
Argentina (1993Q1 - 2006Q1), Brazil (1991Q1 - 2006Q1) and Mexico (1980Q1 2006Q 1) using co integration and causality test. The quarterly data of GDP at
constant prices and export of goods and services at constant prices with different
periods is used in this paper. To test for the existence of the unit roots using both
ADF test and PP test, besides ZA test (Zivot and Andrews, 1992) is used for a
structural break. The Johansen procedure is applied to test cointegration relationship
between exports and economic growth in above three countries. When two variables
are cointegrated, this study use causality tests within an error correction model to
test causal relation. The results show a cointegration relationship in Argentina and
Mexico in both a pre-break and post-break period except Brazil. Bidirectional is
found for Argentina and Mexico in the post-break period and undirectional from
export growth to economic growth in the pre-break period. Moreover, undirectional
link from export to GDP is found in short run causality test for Brazil. So, the paper

13


indicates that exports cause economic growth support to export-led growth
hypothesis.
Hsiao and Hsiao (2006) used time series and panel data in 1986-2004 to
examine the causality relations between export, FDI, and GDP in East and
Southeast Asia including Korea, Taiwan, HongKong, Singapore, Malaysia,

Philippines, Thailand, and China. This study applied ADF, DF-GLS and KPSS unit
root tests, Johansen cointegration test, and Granger causality test based on VARin
time series. Two different panel unit root test consist of IPS and ADF-Fisher tests,
and Granger causality test is used in panel data to explore the causality relationship
between the variables. The results indicate that each country has different causal
relationships, however, exports and FDI are cause of economic growth,
unidirectional from FDI to exports is also found, and in addition, GDP has weak
impact on exports for the panel countries.
Ismail and Haijito (2003) examined the causality relationship between
exports and economic growth in the Asean countries using annual data of real
exports and real GDP during 1966-2000 periods. Similarly other many researches,
this paper also uses ADF test, Engle and Granger (1987) and Johansen (1988)
cointegration test, and Granger causality test. The results show that exports and
economic growth are cointegrated leads to exist a long run relation between them in
Indonesia and Singapore. They find that there is a bidirectional, feedback causality
relationship between two variables for the Philippines and Indonesia and a
undirectional causal link running from exports to economic growth in Singapore. In
the case of Malaysia and Thailand have no causal link between exports and
economic growth.
Kemal et al. (2002) investigated the relationship between exports and
economic growth over the period of 1960-2000 in the South Asia region, namely
India, Pakistan, Sri Lanka, Bangladesh, and Nepal. The paper uses annual time
series data on real exports and real GDP in local currency units. The study uses
ADF and PP test to checking for stationary of variables and the long run

14


relationship between real exports and real GDP is found in all countries by
Johansen's cointegration technique. The results of Granger causality tests based on

error correction models indicate that there is bidirectional causality for Bangladesh,
Nepal, and Sri Lanka and undirectional causal link from exports to growth for India
and Pakistan in the long run. In the short run, a one way causal relation running
from exports to GDP is found in Bangladesh and Sri Lanka and reserve for India
and Nepal while Pakistan have no causal link. In general, the results of paper
support export-led growth hypothesis for five countries in South Asian region.
Ekanayake ( 1999) tested the causal relation between exports and economic
growth in Asian developing countries using annual data for the period of 19601997. Eight countries were analyzed in this paper with the period specified in the
parentheses including India ( 1960-1996), Indonesia (1965-1997), Korea (19601997), Pakistan ( 1960-1997), Philippines ( 1960-1997), Sri Lanka ( 1960-1997) and
Thailand (1962-1997). The data on gross domestic product (GDP) and exports for
this paper are the GDP deflator and export price index (1990=100). This study uses
the co-integration and error correction models to examine the causal relationship of
two variables. ADF test is used to test for unit roots in this paper and the results
show the presence of unit roots in all series for all countries in first difference. The
next, two methods Engle-Granger and Johansen- Juselius is applied to check causal
relation between exports and economic growth for each of eight Asian countries.
Granger causality could be detected when two variables are cointegrated. The
results indicate that bidirectional causality exists between exports and economic
growth in all countries except Malaysia. The strong long run Granger causality was
found from export growth to economic growth in all cases. There is short run
Granger causality from economic growth to exports in all nations excepted Sri
Lanka. On the contrary, evidence of short run causality from export growth to
economic growth only was found in Indonesia and Sri Lanka.

15


Table 2.1 summarizes empirical studies on the causal relationship between
foreign direct investment, exports, and economic growth which are mentioned in
this paper.

Table 2.1:

Summary(~( empirica/.wulies

Previous studies
(time series and
anel data)

Countries

on causali(r between Fl)f, exports. am/ economic xrowth

Time
period

Variables

Methodology

Results

1960-2009

EX, FDI,
GDP,
openness,
Ex. rate,

Co integration

Six cointegration vectors

4 South Asian
countries

1973-2010

Trade, FDI,
GDP

GMM

EX---> GDP
FDI--> GDP

Turkey

2002-2011

EX,GDP

Co integration,
Granger causality

EX+-+GDP

Mangir (2012)

Hossain (2012)

South Asian
countries
Bangladesh,
India, Pakistan

1972-2008

FDI, GDP

Cointegration,
Granger causality

FDI 0 GDP (B)
FDI ---> GDP (I,P)

Sun (2011)

China

1985-2010

FDI, GDP

Cointegration,
Granger causalit~

GDP---> FDI

Erecakar (2011)

Turkey

1970-2008

Growth,
FDI, trade,
and inflation

Cointergation test

FDI--> GDP,
Inflation, trade surplus --->
GDP

Tekin (20 II)

Least
developing
countries

1990-2009

EX, FDI,
GDP

Granger causality

EX---> GDP
FDI---> GDP
FDI---> EX

1988-2008

EX,GDP

Panel unit roots
(LLC, IPS,
Breitung, MW,
Choi)
Panel cointegration
(Pedroni, Kao)
Panel causality
(Gran er)

GDP---> EX

1970-2007

FDI, GDP

Co integration,
Granger causality

FDI +-> GDP
(S, I, P, T)
FDI 0 GDP (M)

Cointegration,
Granger causality

EX -->GDP (l)
GOP-> FDI (l)
EX+-+GDP (P)
GDP 0 FDI 0 EX (M)
FDI +-> GDP (T)
EX ---> FDI (Mexico, C)
EX ---> GDP (Mexico, C)

Bounds testing
approach

Trade openness---> GDP
FDI---> GDP

Babalola et al.
(2012)

Nigeria

Javed et al.
(2012)

Safdari et al.
(2011)

l3 Asian
developing
countries

Rudraet al.

(2009)

5 Asean
countries
Singapore,
Indonesia,
Philippines,
Thailand,
Mala sia

Miankhel et al.
(2009)

India,
Pakistan,
Malaysia,
Thailand,
Mexico, and
Chile

Baharom (2008)

Malaysia

1970-2005

1975-2005

EX, FDI,
GDP

Trade
openness,
FDI, GDP

16