Foreign Direct Investment (FDI) Promote Economic Growth: Evidence On CIS Countries

Historically,no state has successfully developed without integration into the world economy.Despite the fact that such integration of links is an integral criterion for this integration,and in the past 30 years,developing country policy makers have increasingly paid attention to their involvement.However,despite all the recognized and theoretically justified positive effects of FDI,such as capital accumulation,increased productivity and,consequently,economic growth,as well as many spillover effects,empirical research does not always confirm the positive impact of FDI on national economies.For example,an unhealthy institutional and economic environment in developing countries may be responsible for the lack of positive effects expected from attracting FDI.These mixed results regarding the impact of FDI form the motivation and problem of this study.Identifying and improving the unhealthy institutional and economic environment that prevents many countries from attracting FDI and,consequently,economic growth will always be a major challenge for their governments,which determines the relevance of the study.Thus,the differences in the impact of FDI on economic growth in different types of countries that differ in their development and institutional and economic environments are of particular interest,motivated by the ambiguity of the effects of FDI.The purpose of this study is to identify and analyze these differences.The impact of foreign direct investment to economic growth is probably one of the widely studied topics in academic research in recent years.As such,this paper examines and provides additional and relevant quantitative evidence on the impact of foreign direct investment(FDI)to economic growth,in 9 Commonwealth Independent States(CIS)countries as Armenia,Azerbaijan,Belarus,Moldova,Russia,Kazakhstan,Kyrgyzstan,Tajikistan and Uzbekistan in the period of 1998-2018.Commonwealth Independent States has not a long history.After collapse of the Soviet Union every country starts to be independent and in the same time cooperate with each other and unite to make one union group.The CIS encourages cooperation in economic,political and military affairs,and has certain powers related to the coordination of trade,finance,lawmaking and security.Theoretically,foreign direct investment(FDI)plays an important role in a country's well-being and economic development.First,FDI is not only an influx of capital into a country,but also a concomitant influx of technology,management,etc.Second,FDIincreases competition and contributes to the development of small and medium-sized businesses.Third,FDI has a positive impact on employment in the country and increases the level of income of the population.Fourth,they help reduce the trade deficit by shifting consumption away from goods produced abroad to goods produced in the country by enterprises with foreign capitalHowever,along with the overall positive impact of FDI on the economy,one cannot ignore the fact that these investments are not neutral for many macro parameters,primarily for domestic investment and private consumption.Foreign investment can displace domestic investment,thereby reducing the rate of economic growth,which requires a more careful analysis of the effects of FDI inflows,especially in low-development countries,where competition for investment in profitable businesses is high.On the other hand,in most cases,the degree of impact of FDI on economic growth is higher than that of domestic direct investment,and thus the negative displacement effect can be compensated for.An additional aspect of the impact of foreign direct investment on growth in developing countries that has not yet been fully explored is related to the country's ability and speed of adaptation of foreign investment.Due to the fact that FDI is not only an inflow of capital to the country,but also a corresponding influx of technologies and know-how,as well as corporate governance standards,the question arises about the country's readiness to accept these innovations,which is related to the level of its development.In addition,there are positive externalities that are transferred from industries with FDI to the rest of the economy,which increase the impact of FDI on economic growth.The international movement of capital is currently one of the main driving forces for the development of the world economy and international economic relations.With regard to the CIS countries,integration into the world economy,and participation in the international division of labor,special importance is attached,since the completion of economic transformations in emerging markets depends largely on the real solution of these tasks.The intensification of mutual investment is particularly important for the prospects of integration of the CIS members are not allowed only among themselves,but also with other countries.FDI can provide a high level of development in Commonwealth countries and promote their inclusion in the system of international economic relationship.The main objectives of the study is to find the impact of foreign direct investment on economic growth in CIS countries.Specifically,the study seeks to examine the effect of foreign direct investment on economicgrowth.The study intends to answer to researched question;Does foreign direct investment promote economic growth in CIS countries or not?Commonwealth Independent States has not a long history.After collapse of the Soviet Union every country starts to be independent and in the same time cooperate with each other and unite to make one union group.The CIS encourages cooperation in economic,political and military affairs,and has certain powers related to the coordination of trade,finance,lawmaking and security.Financial sector and economic growth was the main point to all that 9 countries from the period of 1991,because independently each country have to has their economy much more stable and improve it annually.The results of the study will guide policy makers on the particular policies they can implement and enforce to ensure foreign direct investment and economic growth.Also the study will serve as a guide to the Investors in terms of making investment decisions on that countries to invest,if there's evidence of financial stability in the intended countries in question.The study will contribute to the existing body of knowledge thus serve as a source of reference for further research in CIS.The problem of attracting and managing FDI in a transition period is one of the key aspects of economic policy-making in the CIS countries.The international movement of capital is currently one of the main driving forces for the development of the world economy and international economic relations.With regard to the CIS countries,integration into the world economy,and participation in the international division of labor,special importance is attached,since the completion of economic transformations in emerging markets depends largely on the real solution of these tasks.The need to attract FDI is extremely urgent for the CIS countries.With a certain generality of problems of attracting foreign direct investment,CIS countries also have specific features,especially in their approaches to solving this problem.The special relevance of the issue under study is that these economies are implementing systemic transformations.The complexity of the problems of attracting external capital makes it very useful to study the existing experience in this direction.The total population of almost 300 million indicates the presence of a huge potential market,and the vast territory is a promising source for producers from the industrial sector.At the same time,the urgent need for foreign investors due to limited domestic investment,as well as the domestic demand for modern technologies and know-how,are a powerful reason for the governments of these countries to create favorable conditions forforeign investment.Foreign firms,in turn,take a unique position in helping the CIS countries regulate and reduce both the external debt and the deadweight of their economies.In addition,foreign companies by their successful economic activities not only financing economic growth and structural reforms,improve functioning of the economy and contribute to the construction of market infrastructure,but also by their presence in the country produce a so-called demonstration effect in spreading new knowledge,skills and management skills in modern market conditions.The leader among all CIS partner countries in terms of GDP is Russia(us $ 1657.55billion),which accounts for more than 75% of the total value of this indicator within the Union and 1.9% of the global level).In the CIS,Kazakhstan(us $ 170.54 billion)and Ukraine(us $ 130.83 billion)occupy the second and third places in terms of GDP,respectively.The lowest indicators were recorded in Tajikistan(us $ 7.52 billion),Moldova(us $ 11.31 billion)and Armenia(us $ 12.43 billion).According to the results of 2018,Azerbaijan and Russia have the lowest GDP growth rates(1.3 and 1.7%,respectively).In2018,all the countries of the Union are experiencing an increase in economic growth rates.However,GDP growth for individual CIS countries is still differentiated.According to the world Bank,in 2018,GDP by PPP per capita in Kazakhstan was marked at the level of27830.6 us dollars,in Russia-27147.3 us dollars.The value of this indicator is lower in the rest of the CIS countries.As can be seen from table 1,Tajikistan and Kyrgyzstan are characterized by a low level of economic development(us $ 3443.7 and us $ 3877.9,respectively).It is worth noting that almost all CIS countries except Russia and Belarus have a deficit in the state budget.In Armenia,the value of the budget deficit in 2018 was 5.4%,which does not meet the Maastricht criterion,according to which this indicator should not exceed 3% of GDP.One of the important indicators for assessing the investment attractiveness of national economies for foreign investors is the accumulation rate.Uzbekistan has the highest share of the accumulation rate(40% of GDP).The lowest value of the indicator within the CIS was recorded in Ukraine(19%).For other countries of the integration Association,the accumulation rate is higher.A comparative analysis of the data presented in figure 2 reveals a sharp decline in FDI inflows in five out of ten CIS countries by the end of 2018.The drop in investment is observed in the following countries: Azerbaijan(-51.1%),Russia(-48.6%),Kazakhstan(-18.2%),Ukraine(-9.5%)and Turkmenistan(-4.8%).The remaining CISmember States recorded a slight increase in investment.The total inflow of FDI from all CIS countries decreased by 36.2% in 2018.Analysis of the data shows that countries differ significantly in terms of economic growth and investment development.Activation of the process of foreign direct investment between the countries under study is an important factor in maintaining sustainable economic growth in all countries of the CIS group at the present stage.In order to enhance cooperation between the CIS countries in the field of FDI,it is necessary to increase the role of direct investment funds(FPI)in financing investment projects.The main problems of attracting direct investment from sovereign funds that hinder the expansion of economic cooperation in the CIS countries include following reasons:-there is not a sufficient number of bilateral sovereign funds between individual countries of the Union,and they have a weak role in financing investment projects;-an obstacle For private investors is the internal contradiction of the legislation of the CIS member States in the field of FDI and the lack of a unified Agreement on the promotion and mutual protection of investment;-An unfavorable investment climate,which is associated with a low level of solvent demand,instability and differentiation of financial stability indicators,business conditions and geopolitical risks(sanctions imposed on Russia).FDI in the CIS countries has become a factor in stimulating investment activity and global capital flows.Although their value is average by international standards,there is little doubt that FDI contributes significantly to the development of the economic potential of these countries.Like other transition economies undergoing deep economic and political changes,CIS countries need large capital inflows to modernize and restructure their economies.Foreign capital,in the form of funds,management skills,technology and knowhow,can and in some cases already play a key role in the transition process.Since the beginning of the 90 s,CIS countries have been actively attracting foreign direct capital,but the volume of this capital is still below the expected level.The negative distinguishing feature to attract foreign capital has mostly found a place in the agricultural and raw materials complex of the CIS countries.Only those countries that do not have significant natural resources,such as Belarus and Armenia,have made attempts to boost the production of industrial goods through attracting FDI,but the results are still not very impressive.In the early 1990 s the annual inflow of foreign capital in the above countries was between 0.5 and 1 billion dollars.In the mid-90 s,this process accelerated,especially inKazakhstan and Russia,according to official statistics.Foreign investors are beginning to play a significant role in some sectors of the economy,despite the fact that the indicators of accumulated foreign capital are relatively low.Statistics on foreign investment are not complete,because they are selected and analyzed using far from perfect statistical methods,as well as because of the low level of reliability of some official sources.Each CIS country individually has its own specific shortcomings in the field of statistics,but a common problem in assessing any economic indicators(including the assessment of foreign direct investment)is the unreliability of data and the traditionally poor quality of data provided by state statistical structures.In the analysis of FDI inflows to the CIS countries it is possible to divide these States into three key groups.First of all,there is a group of energy exporting countries(Azerbaijan,Kazakhstan,Russia and Turkmenistan).FDI in these countries differs from investment in other Commonwealth States,since it is mainly directed to the fuel and energy complex(FEC).The motivation for such investments is different from the motivation for investment in other sectors of the economy-here,industry-specific factors come to the front: size,quality and geographical location of resources.In addition,from the average for the economy tax regime in the extractive sectors often varies significantly.At the same time,the experience of Russia and Kazakhstan shows that even in such a specific area of investment as the fuel and energy sector,the overall investment climate(legislative support,transparency and quality of corporate governance)significantly affects investment decisions.In this work was used theoretical bases of V.Leontiev and P.Welfens-P.Jasinski on how FDI influences economic growth in developed and developing countries.Literature review of the above studies between foreign direct investment and economic growth has both positive and negative relationship results.Some researchers made studies just on one county some of them took countries as a group.On both studies results were mixed and diverse.To imperially examine the impact of foreign direct investment on economic growth in CIS countries,the study use dependent and independent variables.As dependent variable the study use GDP and as independent variables: the government expenditure,import and export.This study contributes to the existing literature in many ways: First,the study empirically examines the impact of FDI on economic growth in the presence of controlvariables for CIS countries.Till now,no study has examined the issue of FDI led growth in CIS countries.Hence,this study adds something new to the existing literature on CIS countries.Moreover,to examine the relationship between FDI and economic growth in the presence of control variables for CIS countries,this study employs second generation panel cointegration technique such as Westerlund Cointegration Method,which is superior to other cointegration tests due to its applicability to models suffers from cross sectional dependency and slope heterogeneity.Moreover,this study employs advance panel econometric method such as Augmented Mean Group method to estimate the long run coefficients.AMG is superior to other cointegration tests due to its applicability to non-stationarity data and the models suffers from endogeneity and heterogeneity.Another empirical contribution of the present study to the existing literature is that it employs recently developed granger causality test such as Dumitrescu Hurlin panel Causality Test,which is superior to other panel causality test.The basic theme of the study is to analyze the impact of FDI on economic growth.The conceptual framework,given in figure 1,shows the mechanism through which FDI affect economic growth via different channels.An increase in FDI inflow results in knowledge spillovers due to the fact that foreign multinational companies infuse knowledge and skills in the form of new ideas and techniques.These knowledge spillovers in turn leads to increase degree of innovation,increase in resource transfer and creates employment opportunities.On the one hand due to exchange of knowledge and ideas,human capital in the host country developed,which result in economic growth.On the other hand,the creation of employment opportunities due to resource transfer and increase in proactive activities leads to economic growth.Moreover,an increase in degree of innovation leads to increase in productivity,which result in enhancement of economic growth.Besides knowledge spillovers,FDI inflow also result in inflow of foreign capital,which increases the foreign exchange reserves in the host country.An increase in foreign exchange reserves in the host country improves the balance of payment situation in the host country,which ultimately leads to economic growth.To examine the long run relationship among variables in model 1,the first step is to check the order of integration among variables.Because when nonstationary variables are used,the regression analysis could not show up consistent and a null regression problem may give the impression.In order to test the unit root in empirical investigation,different panel unit root tests usually applied by researchers.However,due to more applicability,thisstudy used Levin,Lin & Chu and Im,Pesaran and Shin panel unit root tests to test the unit root analysis.After confirmation of cointegration among variables used in model,this study employs Augmented Mean Group method to estimate the long run coefficients.AMG method is popularized by Eberhardt & Tea.AMG method has many advantages.AMG is superior to other cointegration tests due to its applicability to non-stationarity data and the models suffers from endogeneity and heterogeneity.Moreover,as the variables are mix order of integration,hence,this study applies panel cointegration technique to examine the long run relationship among the variables GDP and its determinants FDI,GCE,EXP and IMP.For this purpose,this study employs AMG method.Due to non-stationary data and existence of cointegration among variables,the focus of this study is estimating the long run coefficients via Augmented mean group method.However,due to endogeneity problem,this study also estimates the coefficients via 2SLS method.As to confirm the results that were acquired by the Westerlund cointegration test,an econometric model was set in the second phase and the two stage least squares method is applied.A key feature of all regression models is the error term,which is included to explore sources of errors that are not detected by other variables.In the linear regression model,the dependent variable is supposed to be a linear function of one or more independent variables plus an error introduced to account for all other factors.In this section of the study,the GDP growth is used(LPGDP)as the dependent variable;the FDI growth(LPFDI),the General Government final consumption expenditure growth(LPGE),the export growth(LPEX)and the import growth(LPIM)as the independent variables.As already noted,D refers the first difference in the estimation model.While the estimation equation is set up,variables' lag lengths are taken as 2 according to results of cointegration tests determined on SC basis in order to find a consistency between the applications.Since,the explanatory variables used in the model might be correlated with the error term of the model,which is known as simultaneous equation bias.To cope with this problem,this study used 2SLS method,which used instrumental variables to deal with endogeneity problem.Two-Stage least square technique takes into account and controls the simultaneous correlations among the residuals,and estimates a group of equations simultaneously.The explanatory variables and their lags are used as instruments.Two-Stage least square enables us to check the reverse causation among the variables in the model.To examine the causal relationship among variables,this study employs Dumitrescu Hurlin panel Causality Test results.The DH panel Causality Test is statistical hypothesis testfor determining whether one panel series is useful in forecasting another one.The DH panel Causality Test for causality is such technique,seeking the direction of causality between LPGDP,LPFDI,LPGE,LPEX and LPIM of nine CIS countries.The series of FDI,government expenditure,import and export in that countries is said to Granger cause them if it can be shown by providing statistically significant information about the future value of GDP in CIS countries.Based on the results of Levin,Lin & Chu and Im,Pesaran and Shin test,it is decided that the variables are mix order of integration.Since,the variables are mix order of integration,hence,this study applies panel cointegration technique to examine the long run relationship among the variables GDP and its determinants FDI,GCE,EXP and IMP.For this purpose,this study employs Westerlund panel cointegration test.The results of Westerlund ECM panel cointegration test demonstrate that there exist cointegration among the variables GDP and its determinants FDI,GCE,EXP and IMP.The result of this study shows that FDI helps stimulate economic growth,it's highly significant and has positive relationship for the countries in this study.Other macroeconomic variables also play an important role and have positive relationship with growth and to illustrate it this study also works on impact of government expenditure,goods import and goods export on economic growth in CIS countries.Based on these results,recommendations are made for the governments and policy makers of these countries to aid in their economic growth and development.Empirical results from the study can be summarized as follow.Firstly,FDI flows promote economic growth in CIS countries and have positive effect in long run relationship.Secondly,government expenditures,goods import and export also showed a positive relationship with economy growth.As a result it can be declared that FDI is an important factor for economic growth in long run relationship,especially for developing countries like CIS.Results show that there is a strong complementary connection between FDI and economic growth,it has statistically highly significant effect on the input growth component of economic growth.Efforts to attract FDI for promoting growth in that economies should be encouraged.However,it should be done a lot of work by policies to attract FDI on that country's economy.Policies that aim to attract FDI for the short run will not bring a lot of benefits to this country.But we also have to remember that in fact FDI is not always has positive impact on economic growth.According to the different studies FDI also have a negative impact,it all depends oncharacteristics of the investment resulting from FDI such as sector,type,duration and so on.Country administrations should put strategies to develop the features of human resources and labor skills.Since FDI always comes with technology,here requests to be greatly trained employment in order to utilize the new technology and to produce a helpful hi-tech transmission result.At the same time government have to look into policies on money supply,government expenditure,goods import and export and total credit for private sector in order to improve economic growth and absorb the maximum FDI.We all know that money supply will always bring a positive effect on economic growth for both long and short run in developed or developing countries.That's why monetary policies have to be prioritized in CIS countries for economic growth to make that countries attractive for investors and to improve FDI inflows.Despite differences in the scale and level of development of economies within the CIS,due to analysis revealed these economies have common problems(weaknesses)that determine how the post-Soviet countries will develop on the world stage.Nevertheless,the countries of the CIS also have strengths that have a lot in common.These include: huge reserves of natural resources;geographical locations and market size.If we consider that the volume of mutual direct investment between CIS countries will increase through joint efforts of the state policy,it will contribute the development of economic cooperation in the framework of the studied region.To achieve a synergetic effect from economic integration in CIS,it is necessary to develop effective economic measures in the field of attracting foreign investment and comprehensive state investment policy that is based on the principle of warranty and stability.