Impact of FDI and Export on economic growth:

A panal data analysis of south Asian Countries

Thesis Submitted to
The Superior College, Lahore

In Partial fulfillment of the

Requirement for the Degree of

Master of Business Administration

By
Name of Research Scholar
NidaAbid
Roll No. MBP (13207)
Session: 2012 - 2015
1

The Superior College (School of Management Sciences), Lahore

August-2015

Impact of FDI and Export on economic growth

A panal data analysis of south Asian Countries

By
Name of Research Scholar
NidaAbid

Roll No. MBP (13207)

Session: 2012 - 2015

Thesis Submitted to
The Superior College, Lahore

In partial fulfillment of the

Requirements for the degree of

Master of Business Administration

Approved By:

_________________________
Program Manager
_________________________
Mr. Muhammad Haris

Research Supervisor

Thesis Submitted to

The Superior College

School of Management Sciences, Lahore, Pakistan

DECLARATION TO BE FILLED BY THE STUDENT AT THE TIME OF

SUBMISSION OF THESIS TO THE SUPERVISOR AND/OR FOR EXTERNAL
EVALUATION

Section 1: Particular of the Student

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Full Name

NidaAbid

1.2

Fathers Name

AbidHussain

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Roll. Number

MBP (13207)

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Program

Master of Business Administration

Section 2: Particular of the Thesis

2.1

Title

Impact of FDI and Export on economic growth

2.2

Supervisors Name

2.3

Date of Completion

Muhammad Haris

The Superior College

School of Management Sciences, Lahore, Pakistan
SUPERVISORS CERTIFICATE ON
6

THESIS SUBMITTED BY A STUDENT

Section 1: Particulars of the Supervisor

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Full Name

Muhammad Haris

1.2

Address

The Superior College, School of Management Sciences,

Lahore.

Section 2: Particulars of the Student

Section 3: Particulars of the Thesis
2.1

Full Name

NidaAbid

3.1
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Title
Fathers Name

Impact of FDI and export on economic growth

AbidHussain

3.2
2.3

Date
of Completion
Program

Master of Business Administration

certify that:
a. The above named student has completed the cited thesis under my guidance and
supervision.
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c. I consider it worthy of submission for external evaluation.
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Declaration of Originality

I . hereby solemnly declare that this project:

a) is my original work, except where otherwise acknowledged in the text
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Declaration of Originality:

I hereby declare that this project is completely my own work and any additional sources which
are being used in this project have been duly properly referenced.

I hereby declare that any Internet sources published or unpublished works from which I have
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this will result in failure of this project due to plagiarism.
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Acknowledgement

10

Project in any field of study is the kind of achievement for which every student is looking for
and thinking upon throughout his academic session that what it should be & how should it be
completed. It is definitely a keen desire of every student to full fill his requirement. It needs
thorough study, untiring efforts, hard work with full devotion towards the cause and last but
not the least proper guidance and corporation from seniors and instructors.
I extend my gratitude to sir hariswhose guidance, broadened vision and ample experience
has served as a lighthouse in this incredible venture for completion of the project.
Secondly, I am grateful to my parents and all those persons who helped me and prayed for
me all the time for my success.

11

Abstract
This study examines the relationship between FDI and Exports on economic growth. We see the
impact of foreign direct investment and export on economic growth in host countries. Usually
the objectives of the home countries are to earn maximum profit and the host countries are the
interested in the benefits of foreign direct investment and exports which are in the form of
managerial skills and advance technology, increase government revenue. We used panel data of
six countries for the period 1994 to 2013. Different approaches will be used to show the
relationship between the foreign direct investment and export on economic growth. So GDP is a
dependent variable and FDI and export are independent variable. Quantitative methodology has
been used in this study. The time series, panel and secondary data can be used. In this study
source of data collection is world development indictor. We apply unit root test, descriptive and
random effects model to clearly identify the impact of FDI and exports in developing countries.
First of all we are using the unit root test to check the stationary and non-stationary data level
and find all variable are stationary. In second we apply the descriptive statistic test apply in this
table we check the minimum and maximum value of data. In third we apply random effect model
FDI and export positive and significant effect on GDP. And last one we apple husman test to
check that we used random effect model or fixed effect model.

Key words:
Foreign direct investment, Export and Economic growth.

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Executive Summary

The objective of this research is to analyze the effect of foreign direct investment (FDI) and
export (EXPT) on the economic growth. For this investigation the research used a sample of
panel observations for six developing countries over the period 1994-2013. The data has been
collected from the World Development Indicators (WDI). In this research we use growth rate of
GDP as dependent variable which represent the economic growth. The foreign direct investment
and export has been used as independent variables. Following panel data model, we apply
Random effect model to clearly analyze the impact of foreign direct investment and export on
economic growth of Pakistan, India, Bangladesh, Indonesia, Malaysia and Sri Lanka.

The investigation shows that result are statistically significant. In this study we are using the unit
root test to analyze the stationary and non stationary level and the result shows that all variable
are stationary. After analyzing unit root test we apply the descriptive statistic test to check the
minimum and maximum value of data. Finally we apply random effect model to check the
impact of FDI and EXPT on GDP, the result of random effect model shows that FDI and EXPT
have positive and significance effect on gross domestic production (GDP). The coefficients of
FDI and EXPT are statistically significant and coefficients are positive as they were expected.
The overall result shows that impact of foreign direct investment on economic growth is more
statistically significant if we compare with export. After analyzing the data we come to the

13

conclusion that it is needed to improve the export and increase the foreign direct investment to
improve economic growth and welfare of these country.
In this study we included most important variables to analyze the impact of foreign direct
investment and export on Gross domestic production on the basis of theoretical narrations, yet in
future studies it would be useful to increase the number of observations and also include some
other variables in the analysis as well. Inclusion of other variables e.g. import, remittance etc
may improve the value of the coefficient of determination.

Contents
Chapter 1:................................................................................................................ 12
Introduction.............................................................................................................. 12
1.1 Background:......................................................................................................... 12
1.2 Purpose of the study:............................................................................................... 16
1.3 Objectives of the study:........................................................................................... 16
1.4 Significance of study:.............................................................................................. 16
1.5 Scope of this study:................................................................................................ 16
1.6 Research Question:................................................................................................. 16
1.7 Hypothesis:.......................................................................................................... 17
Chapter 2:................................................................................................................ 18
Literature Review:..................................................................................................... 18

14

2.1 Theoretical model.................................................................................................. 32

2.2 Theoretical framework............................................................................................ 33
2.2.1 (a) Dependent variable:......................................................................................... 33
2.2.1(i) Economic growth:......................................................................................... 33
2.2.1 (b) Independent variable:....................................................................................... 34
2.2.1 (i) Foreign direct investment:............................................................................... 34
2.2.1 (ii) Export:...................................................................................................... 34
Chapter 3:................................................................................................................ 36
Data and Methodology:............................................................................................ 36
3.1 Data set:.............................................................................................................. 36
3.2 Time period:......................................................................................................... 36
3.3 Selection of countries:............................................................................................. 36
3.4 Proxy measures for economic development:..................................................................36
3.5 Research Methodology:........................................................................................... 37
3.6 Model:................................................................................................................ 37
3.7 Gross domestic products:......................................................................................... 37
3.8 Foreign direct investment:........................................................................................ 37
3.9 Export:................................................................................................................ 37
3.10 Research method:................................................................................................. 38
3.11 Analysis plan:...................................................................................................... 38
3.12 Panel data analysis:............................................................................................... 38
3.13 Descriptive statistic:.............................................................................................. 38

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3.14 Unit root:........................................................................................................... 39

3.15 Random effect model:............................................................................................ 39
3.16 Husman test:....................................................................................................... 39
Chapter 4:................................................................................................................ 40
Data Analysis:........................................................................................................... 40
4.1 Descriptive Statistics:.............................................................................................. 40
4.2 Unit Root Test:...................................................................................................... 41
4.3 Random effect model:............................................................................................. 42
4.4 Hausman Test:....................................................................................................... 42
Chapter 5.................................................................................................................. 46
5.1 Discussion of result............................................................................................ 46
Chapter 6:................................................................................................................ 50
Conclusion and Recommendation:...........................................................................50
6.1 Findings:............................................................................................................. 50
6.2 Limitations and delimitations:................................................................................... 50
6.3 Summery............................................................................................................. 51
6.4 Conclusion:.......................................................................................................... 52
6.5 Recommendation:.................................................................................................. 54
Reference................................................................................................................. 55

16

Chapter 1:
Introduction
1.1 Background:
It is not possible to analyze the economic growth of the developing countries in current period
without examine the joint relations between these economies and those of the developed
countries. The primary measure of economic activity used by economist to calculate growth is
real gross domestic product (GDP). GDP captures the entire productivity of an economy.
Equivalently, it can be watch as the total earnings earned in that economy. There is very large
variation in the economic growth of different countries. Many countries like United States or
Western Europe have stable economic growth and these countries at least take 100 years to get
this strength. The economic growth of these countries in term of GDP is very good but also if we
measure wealth as income per capita is satisfactory. On the other hand there are many developing
countries where a majority of population lives below to the subsistence level. The rate of
economic growth is increase and decrease by the variation in investment rates and the change in
the rate of growth of the working force, by the modification plans and by the initial business deal
plan, as well as by the level of financial improvement and the product composition of exports.
The global economic situation has been change from last twenty years, the investment style or
capital flows in the form of foreign aid has shrunk, and the most powerful organizations like
International Monetary Fund and World Bank have not been able to solve and fulfill the needs
and development problems of many developing countries. The financial planner and
policymakers of developing economies give very importance to capital flows in the form of
17

Foreign Direct Investment (FDI). High level of foreign direct investment shows the future
growth and future economic strength of that country.
Foreign Direct Investment means the capital inflows from other countries and invests in such a
manner which increases the productive capacity and develops new sources of income of host
country. FDI plays very important role in developing economies and also provides a win-win
situation to both the investing country as well as to the host country. The investing country can
take benefit of the free market accessibility that it gets in the host country. The host country on
the other hand can improve its financial capital for growth, increase export competitiveness, and
increase its labor productivity by strengthening its skill base and enhancing technological
capabilities. Many other researches and studies show that there is a strong and positive
correlation between Foreign Direct Investment and growth.
Exporting is a main and important section of worldwide trade. The process of export is the
transfer of products or goods and services, shipped by air, shipped by vessel, information transfer
through mail, uploaded or downloaded from an internet site. The process of export also includes
the sharing of information that can be sent in the form of an email and fax. The majority of the
major organizations working in developed economies will get a large part of their annual
revenues from exports to other countries. Export is the process of selling goods and services to
other country which helps an economy to grow and increase their overall income.
Government of the developing countries wants to create new job opportunities and reduce the
pressure on the balance of payment; export of goods and services is the best and important
source of foreign exchange income. Countries want to increase their export to compete in the
world market, which creates new employment opportunities, increase productive capabilities and
also improve production capacity. With the help of new technology and increasing production
capacity countries are able to integrate in the world economy and minimize the impact of
external shocks on the domestic economy.
UNCTAD (2004) estimates that as most developing countries experience a shortage of capital,
this is reflected in their respective savings-investment and import-export gaps, which implies that
developing countries have insufficient savings and foreign exchange to finance their investment
18

needs. To bridge this gap they need an inflow of foreign capital and exports growth. FDI is an
important source of capital for growth in developing countries. In the 1960s and 1970s many
countries maintained a rather cautions and sometimes an outright negative, position with respect
to foreign investment. In the 1980s, however, the attitudes shifted radically towards a more
welcoming policy stance. This change was mainly due to economic problems facing the
developing world. While FDI is surging, other forms of capital flows to developing countries are
diminishing. Aid has continuously declined as a share of capital inflows since the 1960s.
Commercial loans, a major source of capital flows in the 1970shas virtually disappeared since
the debt crisis of the 1980s.
Togan (1993) investigates the changes in the structure of export incentives in Turkey from 1983
to 1990. The export incentives are export credits, tax rebate scheme, premium from the Support
and Price Stabilization Fund, duty free imports of intermediates and raw materials, and
exemption from the value added tax, foreign exchange allocations, exemption from the corporate
income tax and other subsidies. The study finds that during the 1980s the level of the economywide subsidy rates and that of inter-industry dispersion of incentives has substantially been
lowered. The study also finds that the Turkish export- and import-competing industries have
benefited from the export incentives more than the other sectors.
A more recent study of Sharma (2001) investigates exports determinant in India using annual
data for 1970-98. The study uses simultaneous equation framework. The results of study suggest
that demand for Indian exports increase when its export price falls in relation to world prices.
Furthermore, the real appreciation of the rupee adversely affects Indian exports. Exports supply
is positively related to the domestic relative price of exports and higher domestic demand
reduces export supply. Foreign investors appear to have statistically no significant impact on
export performance, although the coefficient of FDI has a positive sign.
Foreign direct investment refers to long term participation by one country to another country. It
usually involves participation in management, organization, transfer of technology and skill.
There are two types of FDI inward foreign direct investment and outward foreign direct
investment, resulting in a net FDI inflow (positive or negative). For the Pakistan the amount of
19

FDI inflows increased from $245 million in 1990 to $4273 million in 2006 (WDI indicators
2008). In 2010 foreign direct investment, net inflow (% of GDP) in Pakistan was 1.14. Over the
past 30 years, its highest value was 3.90 in 2007 and its lowest value was 0.1 in 1983.
Ms. RashmitaBarua, 2006. The role of FDI in the growth process of the host country has long
been a topic of discussion. Several of the discussions and studies reveal that there is a strong and
positive correlation between FDI and growth. Apart from acting as an engine for technology
transfer (or diffusion), FDI also stimulates domestic investment, international trade, expand
domestic savings, increase its foreign exchange reserves thereby correcting its Balance of
Payments position. All these factors together contribute towards the growth of a nation.
While Alfaro (2003) has found ambiguous relationship between FDI and GDP and also argue
that its impact on host country varies according to the types of policies that host country adopts
for its trade and FDI regulations. The objective of the study is to find out common determinants
of exports and FDI. The study also explores the relationship between exports and FDI whether
both are substitutes or compliments.
(Perkins, 2001)Foreign direct investment (FDI) as a growth accelerating component has received
a great attention in developed countries even in developing and less developed countries during
recent years. It has been a matter of greater concern for the economists how FDI affects
economic growth of the host country economy. In closed economy there is no access to the
foreign instruments and savings, this type of economy solely based on the domestic
savings an d investment sources. But in open economy, the investment comes from both sources
either from domestic savings or foreign capital inflows like FDI. FDI enables the host country to
achieve the investment level beyond its capacity to improve GDP and economic growth. In 1997
FDI has accounted for 45 % of net foreign resource flows to developing countries as compared
with 16 % in 1986.
Mahmood (2011) foreign direct investment plays a very important role for developing countries
for the support of this theory he takes FDI as dependent variable and democracy, manufacturing
products, real exchange rate, real export import duty and enrollment at secondary schooling as

20

independent variables. The result 6 of this study population and democracy positive relationship
and other variables are negative relationship.
The World Bank (2002) reported that in 1997 developing nations has received 36 % of the total
FDI flows. Many of the studies demonstrate that there is a positive relationship between FDI
and GDP of the host countries while this study focuses on the impact of FDI on GDP and
its role in the developing countrys economy.
Balasubramanyan et al. (1996) found that FDI accelerate the economic growth of the host
country and its impact is relatively stronger for the countries which have outward oriented trade
policies.

1.2 Purpose of the study:

The purpose of the study is to investigate the Impact of Foreign Direct Investment and Exports
on the Economic Growth of Pakistan, India, Bangladesh, Srilanka, Indonesia, and Malaysia.

1.3 Objectives of the study:

The objective of the study is to analyze the relationship between dependent and independent
variables over the period 1994 to 2013.

1.4 Significance of study:

This study helps to investigate the effect of foreign direct investment and export on economic
growth. The significant of this study is that to increase the growth in developing country. The
strong and positive relationship can be exist by promoting the technology, per capital, expand
market size, export and increase employment. The higher employment rate in developing country
can increase the productivity. FDI is the major source of investment especially in developing
countries like Pakistan, India, Bangladesh, srilanka, Indonesia, and Malaysia.FDI plays very
important role to increase overall economic growth. Export is also an important factor which
increases the growth of the countries.

21

1.5 Scope of this study:

In this study secondary data collect from world development indicator. The data are taken from
1994 to 2013. This study helps to government to encourage the foreign direct investor to invest
the host countries and export in host countries. This study helps to research to check the impact
of foreign direct investment and export on gross domestic production in host countries. This
study helps to encourage the governments to increase the foreign direct investment and export.
Its examined that the strong and positive relationship can exist between economic growth and
foreign direct investment. Its examined that the strong and positive relationship can exist
between economic growth and export.

1.6 Research Question:

Does there is any relationship between Foreign Direct Investments and Export on the Economic
Growth of Pakistan, India, Bangladesh, Sri Lanka, Indonesia, and Malaysia.?

1.7 Hypothesis:
There is null hypothesis and alternative hypothesis its means that the relationship can be exist in
this study or not.
H0: There is a no relation between FDI and Export on the Economic Growth.
H1: There is a relationship between FDI and Export on the Economic Growth.

22

Chapter 2:
Literature Review:
Ali & Tariq, (2014) describe the concept of general impact of foreign direct investment on
economic growth of the nation. The main purpose of this study is to analyze the effect of
development; investment and handover revenue of technical speed wealth and share ability
power the good benefits and makes the maximum opportunities in global and local markets. On
the other side the financial development sector may inspire the foreign direct investment for
consumer attention concern with markets. For this reason the stakeholder feels extra selfconfident with investing in a country with unique qualities and opportunities. There are two
methods of business dealings the relationship between foreign direct investment and economic
development. They discover the images of financial societies that there is the important
23

relationship between foreign direct investment and economic development for SAARC
countries. It focus that the India, Bhutan, Sri Lanka & Pakistan there is the bidirectional relation
for the nation such as Afghanistan and Nepal positive unidirectional.
Gudaro & Chhapra (2012) Shows that FDI has impact on economic growth of Pakistan. In this
study the data is collected from booklet of Pakistan economy 2005. Range of the data was from
1980 to 2006 and variable are domestic variable, labor force and foreign investment. Gudaro
study the model of development and regression analysis chhapra was studied on FDI and the
result conclude that FDI had negative effect on gross domestic product and foreign direct
investment in the kingdom.
According to Shahzad & Zahid (2008) current FDI is presented from 1991 to 2010 in dolor
(million). Since 1991 its slowly improved to till 1996, however since 1997 the FDI has reduced
to till 2001 and since 2002 to till 2006 again increased and in 2007 to 2008 FDI is too much
increased and after this its fall down. The arrivals of foreign direct investment in Pakistan must
decreased significantly after 2008 from $5.590 billion to $2.016 billion in 2010, the world
investment report (2011), that free jobs and growth session through joint countries session. After
this study shows that foreign direct investment in Pakistan decreased from 5.590 billion dollars
in 2007 to 5.438 billion dollars in 2008 and 3.812 billion dollars in 2009.
Yasin & Ramzan March (2013) Described that if the financial development of local institution
has the positively aimed to develop the country than Pakistan will successfully effect to covert
advantages in foreign direct investment inflow for investors. The figure of foreign direct
investment is bad effect in the example of Pakistan although the communication among foreign
direct investment and economic growth is positive effect. It is possible that if local economic
area work positively and in more efficiently manner then foreign direct investment will have
significant effect on development performance otherwise the impact of foreign direct investment
on financial development sector will be negative. Everywhere foreign direct investment supports
to development by economic growth sector so this study shows the relationship among
development and foreign direct investment. The main purpose is to analyze the effect of foreign
direct investment on the development ratio of productivity exist to controlled through the
24

existence of decreasing revenue in the physical wealth. So foreign direct investment might be
used the level of consequence on the production of per capita but not a rate effect. In another
words we can say that they are not able to change the development ratio of production in the long
run. It is not unexpected; the new financial development concluded that foreign direct investment
was not extremely initiative term of development through main stream finance.
According to Falki (2009) the difference in fresh model of financial development is the foreign
direct investment, it may not have any impact on the level of production per capita but its effect
ratio of development. In this study shows that foreign direct investment improved the
development ratio of per capita income in the local country, and financial development increase
and capital of local countries also increased, technology change and human capital in the local
countries and exports have also increased. Therefore the scope in which foreign direct
investment includes the development depends on the financial and social condition or in other
words the atmosphere of receiver country.
(Malhotra, 2014) The main purpose of this study is to examine that in host countries FDI play a
vital role in financial growth. Mostly countries create new production process in home country
for foreign investment and foreign technology for financial development. The main benefits of
financial improvement with in the country confirm a large amount of local investment,
manufacturing level and employment chance in the developing countries.
Bashir & Mansha, January (2014) this research examine the effect of foreign direct investment
on financial development of Pakistan. This data will derive from 1980 to 2006. The data
examined through using ordinary least square method. The variables nominated are external
services, capital labor power and local money. This data shows the significant result and negative
relationship among foreign direct investment and gross domestic product. This results also shows
that foreign direct investment does not pay the time period as compare to other variables. Foreign
direct investment shows the undesirable association which explained that the development also
decrease during this period. New development opportunities can create satisfactory atmosphere
for foreign depositor to encourage more investments into the country.

25

Ray (2012) the result of the study shows that in 23 established and 78 under developed countries
foreign direct investment play a positive and significant impact on the development of per capita
income. Based on the level of per capita revenue the under developed nation are divided among
two sets. Foreign direct investment show the positive sign but dues to lower salary the under
developed nation was not statistically significant. They complain that local enterprises have not a
good knowledge about technology level to be a supplier so due to this the smallest established
nations learns very slightly from multinational enterprises.
According to Maathai & Mathiyazhagan (2009) somewhere the manufacturing creation is
occupied the commission for gross domestic product. The Indian economy does not cooperate
moving in one direction to interconnection from foreign direct investment to catalog of
manufacturing creation. In this article the data is used of month for manufacturing creation and
gross domestic product. Therefore it was requisite to de-seasonalise the records. Which might be
the including the periodic section in its deviation. Foreign direct investment and financial
development for India and Bangladesh economy worried that the impact of foreign direct
investment of India is not adequate on development case.
Maathai & Mathiyazhagan (2012) the main purpose of this study is to investigate the local
country provides the help in classifying the problems which are concern to the effect of foreign
direct investment at area level. This shows the relationship among foreign direct investment and
financial events in the local nation. In the beginning of research this study had shown that
foreign direct investment are negative effect on development of the under develop nations. The
main argument of this research is that in under developing nation the main focus of foreign direct
investment on primary segment which is essentially less encourages the market worth of this
segment. Primary products imports are received at lower price and export to established
countries. Due to this foreign direct investment show the negative impact on the country.
Nahidi & Badri, September (2014) result shows that the impact of foreign direct investment on
financial development in India, Using the combination method of this period from 1990-91 to
2010-11. This study show the positive relationship between foreign direct investment, gross
domestic product and vice versa through the observed of ordinary least square method.
26

Saqib & Masnoon (2013) the research focus on modern era and dependence theories, they
develop the relationship among foreign direct investment and financial development. In modern
era foreign direct investment helps as the instrument to the financial development. The
philosophy advice that the financial development needs revenue invests. It is necessary that in
new era the education and infrastructure and knowledge transfer improved in under developed
nations through the foreign direct investment. The professional skills and marketing knowledge
transport through foreign direct investment in local countries. In modern era request that foreign
direct investment plays the double purpose through contributing to revenue growth and through
increasing total factor of productivity.
Rahman (2007) the reason of this study is that financial development of countries increase due to
export rise. The impact of foreign direct investment and export on financial development its a
long linear regression the secondary data is used in this article from 1980 to 2009. The south
Asian countries are in this article like Bangladesh, India, Pakistan and Sri Lanka. After this
research he proved that foreign direct investment at 1% level its positively and significantly
impact on Pakistan and Bangladesh but for India economy its show the negative impact and for
Sri Lanka shows the positive impact but with the unpredicted negative sign.
Rahman (2005) this investigation shows that in Bangladesh foreign direct investment increased
at 1980s as compared to previous years. Inflow of foreign direct investment has increase the day
by day. The foreign direct investment of USD has 8927.9 million from 1997 to 2005. And from
2006 to 2010 the foreign direct investment of USD has 4158.63 million. The inflow of foreign
direct investment of USD was 7 million but in 2008 this inflow increased which reached 1086.31
million in USD. But unfortunately these inflows of foreign direct investment start deceased
during 2010 which is 913.32 million which was bed impact on USD.
According to Razeen Kabir (2007) they explain that Bangladesh is the third world nation in
foreign direct investment. In this country foreign direct investment have many benefits at
macroeconomic level where is foreign direct investment level increased financial production and
development. If those nations which is not capable to supply locally therefore foreign direct
investment offers revenue from use sources out of country. The inflows of foreign direct
27

investment help to provide the many financial sectors, including industry, trade organization and
power. Through the foreign direct investment facilitate the tips about how to increase the job
opportunities and remove the unemployment level. Therefore gross domestic product and per
capita income increased in under developed nations and decrease the poverty. Through foreign
direct investment billed relationship with established countries due to this the profit are increased
in the shape of innovation, skills, expertise handover dues to this result are positive. Improved
economic relation also established durable capitalistic market place. Therefore due to foreign
direct investment they ideals of trade authority and public duty. They develop the relationship
among foreign direct investment and development. In job rule of Bangladesh has been
powerfully opened to keep of savings and moneys from abroad. However they have many
benefits and governments of Bangladesh are demanding have target to improve the country due
to this the foreign direct investment of nations has increased. In Bangladesh they give training,
motivation and higher education skills to employees, to get maximum benefits. The purpose of
this article is to collect the historical and geometric inquiry of the relationship among foreign
direct investment and workable financial development.
Mottaleb (2007) this research shows that the foreign direct investment has effect on financial
development in under developed nations. Foreign direct investment plays a vital role in financial
development in under developed sector. Foreign direct investment bring the new technology and
management know how to developed nations. The research also shows that through minimize the
gap among local savings and investment its creating new development opportunities. They find
out that mostly foreign direct investment flows towards the established nation but in under
developed nation these flows are very slow as compare to establish nations. Due to this mostly
under developed nation are failing to achieve the good quantity of foreign direct investment.
Foreign direct investment inflow shows the relation among financial development and foreign
direct investment. Through panel data to 60 low income and lower middle income nations this
research identifies the powerful factor that established the foreign direct investment inflow under
developed nations. This research concludes that foreign direct investment has significant and
positive effect on financial development. Large gross domestic products and high gross domestic
products develops competition in business, creates openly environment with rich infrastructural
services. Internet plays a vital role to effectively attract the foreign direct investment.
28

Rahman A. (2015) the investigation has been done to analyze that through better exports foreign
direct investment has a positive effect on financial development. Therefore foreign currency is
used to pay external debts and foreign direct investment increased the amount of export. Due to
increase of export volume the foreign direct investment of china has increased the financial
development level. Foreign direct investment shows the increase in gross national products.
Foreign direct investment play a vital role to decreased the foreign exchange gap, saving gap,
balance of payment debit, inflation rate, unemployment rate and level of poverty. Foreign direct
investment has also been connected with new business ideas, community jobs and different
methods of exports under developed economic sector.
According to MacKinnon & Chenery (1994) the purpose of the study is to examine the
relationship among exports and gross domestic products. The imports of capital and other
intermediate goods increased the productions and foreign exchange earned from exports. Exports
increased total factor of productivity because of their effect on economies of scale and other
externalities such as fostering technology transfer, improving skill of workers, improving
managerial skills and increasing productive capacity of the economy. The other benefits of
export led development are that it allows for a better use of resource. This reflects the true
opportunity cost of limitd resources and does not discriminate against the domestic market.
Quddous Saeed (2005) this research described that the export was increased day by day like
previous thirty four years at a rate of 7.7 percent per annum of Pakistan. The inflation and
diversion of inter-wing the results shows the rate of 27.1 percent of development in the first of
during the 1970s. The development rate of increased was 10.6 percent per annum in the second
half 1970s in Pakistan export. The development rate increased 1.7 percent per annum in Pakistan
exports hardly registered during the first half 1980s. During the second half of the 1980s export
development rate increased to 11.6 percent per annum. In 1990s the export development rate
increased at the 6.4 percent per annum during the first half. Due to cotton crop this performance
was improved during 1992 to 1993 and 1994 to 1995. The performance of export are effected an
average development rate of 3.0 percent per annum during the late 1990s due to burden of
sanctions. The export rate are increased the rate of 5.4 during the 2000 to 2001 and 2003 to 2004.

29

Raymonds, (1973) find out that the relationship among exports and financial development in this
article all study constraint on this relationship not on the instrument of export Led growth model.
From 1954 to 1969 to analysis the instrument of export led development. 11 industrial nations
through checking the two essential elements of balance of payments impact on assets and export
led development theory economy of scale. The two instrument of export led development by
manufactured exports and balance of payment impact on assets are not established. The result
shows the positive and significant relationship among exports and development.
According to Kishor Sharma July (2000) the analysis of Indian gross domestic products and
export, its shows that export are good as compare to gross domestic products. The time duration
from 1970 to 1798 shows the export rate of Indian economy is 11% per annum while the
development of gross domestic products is 5% which is very low as compare to exports.
Through 1945 to 1995 exports are increased day by day. Many factors include to this incident
including foreign direct investment. This is increased day by day especially from early on the
1990s. In investment between the developing countries Indian economy become the ninth
biggest receiver. However despite increasing inflow of foreign direct investment there has not
been any attempt to assess. Its involvement to Indian export performance one of the channels
through which foreign direct investment affects development.
Glezakos (1973) this research to analysis the study from 1950 to 1966 time period shows the
negative and no significant relationship among export insecurity and financial development
through covering the methodological deficiencies of their studies for 38LDCs and l8 developed
countries. This study shows the effect of export cost and export quantity insecurity impact on
financial development. To find out that exports insecurity has more harmful impact on LDCs
financial growth as compare to DCs. The export cost and export insecurity was more in LDCs as
compare to DCs. Export cost insecurity has higher sever impact on revenue and export
development level as compare to export cost insecurity in LDCs.
Bakar & Subramaniam (2010) this studies to describe the through Augmented Dickey Fuller and
outstanding based to test to check the stationary level of variables and effect of exports on
financial development of Malaysia economy. And co integrated test to analysis the long run
30

relationship among exports insecurity, export development, financial development so these result
check through these test. So this study find out that exports insecurity have show the negative
and significant impact on financial development of Malaysia economy. They increase the
unemployment level rate and decreased the capital formation due to effect of economic plans.
According to Krugman & Obstfeld (2006) an export is more important for foreign exchange
which can be helpful to provide the public resource necessary to convert the production towards
the most development attractive industries. They increased the general skill level of the country
the area of exports increased the productivity of industry due to this export and general skill
increased the human capital. Export increased the development level and show the positive result
and non exports increased the level of economy enhance distribute effectiveness and improve
skills produce active comparative benefits. Exports through foreign exchange provide the better
to right of entry to worldwide market place. Exports increased the economy production potential.
The foreign exchange income from exports tolerates the import of high class intermediary inputs,
mainly capital goods for local production.
Chaudhry & Shirazi (2007) to analysis the currently search in financial development of economy.
Through time series data analysis they find out the relationship among exports and financial
development and the way of causality if the relationship exists there. In the long run its clear
that the healthy relationship among these variables which is exist. Through research it may be
point out that time series investigation relating to LDCs that have used in financial methodology
of together. Therefore a lots of others rejected the export led hypothesis and while they have to
search to analysis the long run relationship.
Gregory (2011) they described that the most important elements of this economy is the
collectively money of goods and services created over a confident phase of moment. Therefore
its known as gross domestic products. In specified time period the market value of total number
of final goods and services create. Actually the gross domestic products calculated by quarterly
but the value is multiply by four so the amount is shown the annual term.
Ahmed & Uddin (2009) this study shows that the most important problem discuss in economic
development so the financial development is more important in this country. Through exports of
31

goods increase the country rate of financial development.

The quantity of imports is

disapprovingly linked to its qualified worth and different positively with collective demand real
gross domestic products. The highest qualified worth leads to replacement away from imports
necessarily falls the dollar value of imports as volume turn down. In industrial development
remittances has been used in financing the import of capital goods and raw materials.
Chimobi (2010) this study to analysis that through granger causality and co integration test they
find out the relationship among export domestic and financial development. The co integration
test indicated no co integration at 5% level of significant. So it shows that the variables do not
have a long run relationship. To decide the way of causality between the variables, the granger
causality test was accepted in the short run. The financial development causes both domestic
demand and export through the research of causality test found. Therefore domestic demand
caused by through export. After this result we found that domestic demand is an essential tool.
They encourage appointment of the nations in international trade.
According to Islam & Hossain (2015) financial development is essential to export domestic
expenditure and assets. And assets and exports domestic expenditure is essential for financial
development. These studies to find out that export have a good impact on financial development.
In international trade the domestic demand and investment have very low due to this they affect
on financial development, when nation has high percentage of expenditure to gross domestic
product or investment to gross domestic products. In these results they find out that expenditure
is more essential as compare to investment contribution to effect on financial development.
Fayissa & Nsiah (2008) describe that in financial development nations somewhere economic
sector are not very good position through supporting system like money savings. Therefore they
help out overcome liquidity constraints. In Pakistan the workers remittances emerged to be the
third important source of capital for financial development. In 1972-73 to 2002-03 the real gross
domestic products is positively and significant correlated to workers remittance.
Hooda (2011) this result shows the foreign direct investment on Indian economy, which explain
that the foreign direct investment have good impact on economic development. Foreign direct
investment shows positive impact on financial development of Indian economy. Foreign direct
32

investment not involves only gross domestic products its involve on foreign exchange of the
nations.
Alfaro (2013investigation has been done to analyze the effect of foreign direct investment and
development in different sector like namely primary, service, manufacturing and economy. The
scope of foreign direct investment in industrial sector like agriculture have low in host country
and in primary sector which have very low means negative impact. The foreign direct investment
increased the gross domestic products of local nations for industrial sector. Therefore developed
sector shows the positive impact on this sector. This study shows the benefits of industrial sector
have more increased. This study to analysis that is result show the positive impact of foreign
direct investment to gross domestic products but on the other hand show the insignificant effect
of foreign direct investment to gross domestic products so which is unclear effects. Finally its
shows that foreign direct investment has different effect on different sector for example its not
necessary that foreign direct investment shows the positive effect on the local economy nations
therefore its highly depends on the economy nature of the nations.
According to Jayaraman & Singh (2007) was to examine the Fiji relationship among foreign
direct investment and development through a multivariate. All variables like real gross domestic
product, real foreign direct investment, employment and inflow apply the ADF test. The bounds
testing approach to co integration depicted two co integration relationships between the variables
when the endogenous variables were formal sector employment and gross domestic products. In
Fiji ARDL examine that gross domestic product and foreign direct investment have positive and
significant effect on employment. Through Granger test examine that moving in one direction
from foreign direct investment to gross domestic products in short run, and moving in one
direction from foreign direct investment to employment in long run. This study examines that
apart from containing its current proactive policies to attract foreign direct investment inflow.
Aurangzeb (2006) described through using the analytical framework to observe the relationship
between export and financial development. The relationship between export and economic
development due to this the country revenue developed. The reason to increase economic growth
is that due to foreign exchange and balance of payment and increase the employment
33

opportunity. Its showed those export sectors are good add to gross domestic product
development as compare to other sector. Using the time series data from 1973 to 2005 shows the
hypothesis of export and non-export productivity factor are not equivalent of Pakistan economy.
In export sector the production level is high and significant. Moreover the research shows that
export are significant and helpful for inward and outward approach. So they say that export is
significant and stationary level.
Iqbal, Azim, Akram, Muhammad, Farooq (2013) the main purpose of this study is to observe the
effect of foreign direct investment, export, governmental instability, exchange rate and economic
development in Pakistan. The data is derived from 1973 to 2010. The observation of time series
data to check the data have stationary or not of all dependent and independent variables. Also
Johansen VAR apply the co-integration to change the economic development, political
instability, foreign direct investment, export, exchange rate and terrorism in long run to short run
using error correction method. Augment Dickey and Fuller show the result to apply the unit root
test. All variables apply the unit root test and show the stationary data at first different level.
After finding results foreign direct investment, export, and exchange rate are showed positively
impact in Pakistan. And terrorism and political instability are negatively effect on economic
development of Pakistan.

According to Ekanayake (1999) in this article shows the relationship among export development
and economic development in under developing countries. Through time series and cross section
method the data is used of two years they study to find out the relationship among export on
economic development and export-led development hypothesis. The data is used from 1969 to
1997 through the co integration and error correction method to observe the relationship among
economic development and export development. In Asian under develop nations. After finding
these result shows that exports development shows the positive effect on economic development.
Through export-led development provides strong supporting. They observe that moving in one
direction cause include export development and economic development in India, Indonesia,
Korea, Pakistan, Philippines, Sri Lanka and Thailand. Here the suggestion for export-led
34

development in Malaysia. Expect in Sri Lanka there is the short run export development to
economic development. Therefore there is no strong observation for short run causes behind this
export development and economic development.
Allaro (2012) the purpose of the study is to examined the export-led growth of Ethiopia, the
fundamental relationships among financial development and exports of the nation. The data is
used from 1974 to 2009. In this research they find out the development of this country is
decreased due to the increase in population therefore due to this the income level of this country
is very low. Therefore they do to control and study to increase export development to achieve
economic development. In 1992 the government of Ethiopian gives the idea of export-led
development for economic development. Due to this export development to foreign markets
developed source distribution and manufacturing proficiency. Export is demanded as the engine
of development. They find that the suggestion of moving in one direction cause among export
and economic development for Ethiopia. Export development reason economic development.
Hossain, Karunaratne (2001) the reason of this study is that in Bangladesh to check the export
development. It analysis that industrial export has develop a new train of export led development
changing the total export for example demanding through the so called de novo hypothesis. After
this observations the base on vector error correction forming purpose that both total export and
manufacturing exports have long run and concurrent impact on the gross domestic product as
well as industrial export. According to the non-nested test total exports develop as the engine of
export led-development. For industrial output both total export and industrial exports develop as
the engines of development. So industrial exports is not only the cause of the export-led develop
for Bangladesh.
Faruk (2013) the research to analysis that in Bangladesh have a many qualities which can make
successfully to take the tension of foreign stake holder for both established and under developed
countries. Macroeconomic atmosphere are litter cause behind to creation of country to make
good looking areas for foreign stake holders. They increased the opportunity of employments
which are skilled and no skilled labor at low wage cost which is beneficially for this country. In
Bangladesh they have many smart packages for foreign stake holders. Costumers are friendly
35

investing without judge the relationship among foreign and local stakeholders. In Bangladesh the
wage rate of employment is very low in Asian countries. The inflation rates are expectable within
the limits and exchange rate is reasonably stable. In under developing countries the foreign direct
investment has good impact like Bangladesh. The under developed countries to search the new
source for development of countries same like the stake holders are search the new source for
investment. The foreign direct investment does not take the source of reserve in under developed
countries but also bring the new technology in under developed countries. The foreign direct
investment play the important role in to develop the banking, industry, manufacturing, weaving,
production, garments, telecommunication and pharmaceuticals industry in Bangladesh nation. In
these articles they find out the foreign direct investment role in economic development and the
relationship among gross domestic product and foreign direct investment. In regression result the
gross domestic product has dependent variable and foreign direct investment has independent
variable. The result shows that foreign direct investment can explain the 83% data of gross
domestic product and p value is less than 0.05 to reject the null hypothesis and accept alternate
hypothesis. Gross domestic product has variation around about 64.0709 units for variation of
each unit of foreign direct investment. The correspondence atmosphere shows the gross domestic
product and foreign direct investment is highly correlated (0.9120249962) in perception of
Bangladesh country. Finally they find the result is that foreign direct investment has big impact
on gross domestic product in Bangladesh economy.
Bashir, Mansha (2014) the main purpose of this study is that the effect of foreign direct
investment on the south Asian countries those are like Pakistan, India, Bangladesh, Sri Lanka,
with China. This article is examined that differentiate among developments of south Asia region
and China. In this article the data is used for examine on annual base. In this article variable are
used in this foreign direct investment, outward responsibility and payments. Investigation tools
of OLS test and granger causality test are used to examine the data. This result shows that the
China financial growths rates are better as compare to south Asia country. The results are shows
that china is most rapidly developed as compare to south Asia countries. Through research they
find that in south Asian countries have to essential that they developed the countries like
manufacturing sector, strong administrative environment, health, safety environment, decreasing
the payments, increasing standard of living and decrease the tax exemption. These countries can
36

developed like China if they develop the foreign direct investment process in country. Due to this
foreign direct investment provide the better revenue structure, local investment and increase the
technology process.
According to Iqbal, Masood (2013) the main target to this article is that to discovery of outlines
of foreign direct investment and financial development in Chinese and Indian economies. They
collect the investigation of qualitative research to check the order, design and movement of
foreign direct investment and financial development of these markets. Due to this they observed
that which nations are best ranking for financial development and enhance for foreign direct
investment. And they observed that which nations are the best nation where performance are
good position and financial development and foreign direct investment are well as compare to
other nations. China is the best country in manufacturing, developing growth, financial position
and environment condition as compare to India they conduct the data form world banks, IMF and
central banks and statistic through the observation many researcher and scholar are works on its.
But India compete chine in well lawful and administrative scheme. But this is conforming that
foreign direct investment are positively effect on financial development of India and China. And
foreign direct investment are positively effect on gross domestic product level due to this the per
capita income of these nations are increased day bay day.

37

2.1 Theoretical model

Foreign direct
investment

Economic growth

38

Export

39

2.2Theoretical framework
2.2.1 (a) Dependent variable:
2.2.1(i) Economic growth:
Economic growth is often defined as an increase in a countrys output i.e. the production of
goods and services. However, economic growth is also sometimes described as an increase in
average incomes and standard of living. Economic growth is commonly measured by a countrys
gross domestic product (GDP) which is the total value of the goods and services produced during
a set period of time. However, there are other measurements of economic growth. Gross
domestic product (GDP) .This is the most common measure of economic growth. It is the total
value of all goods and services produced in a countrys economy during a set period of time.
There are two ways of measuring GDP, nominal GDP and real GDP. Nominal GDP calculates the
value of all the goods and services produced during a set period of time using current prices.
Real GDP involves calculating the value of all the goods and services produced during a set
period of time using constant prices. Economists usually use real GDP when calculating
economic growth in a country because it takes inflation into account. Gross national product
(GNP).This is a similar measurement to GDP. GNP is the total value of all the goods and services
produced by a countrys own citizens during a set period of time. This means that it excludes the
value of production from foreign firms and citizens but includes the value of production from
firms and citizens who are overseas. Just like GDP, GNP can be measured in nominal terms
which uses current prices or in real terms which accounts for inflation. Per capita many measures
of economic growth such as GDP and GNP can also be measured in per capita terms. Per capita
is simply a measurement of economic growth per person. Therefore GDP per capita is the total
value of all the goods and services produced in a country during a set period of time divided by
the total population of the country. Per capita is useful because it shows whether or not output is
increasing per person.

40

2.2.1 (b) Independent variable:

2.2.1 (i) Foreign direct investment:
Foreign direct investment is an investment made by a company or entity based in one country,
into a company or entity based in another country. Foreign direct investments differ substantially
from indirect investments such as portfolio flows, wherein overseas institutions invest in equities
listed on a nation's stock exchange. Entities making direct investments typically have a
significant degree of influence and control over the company into which the investment is made.
Open economies with skilled workforces and good growth prospects tend to attract larger
am1ounts of foreign direct investment than closed, highly regulated economies.
2.2.1 (ii) Export:
A function of international trade whereby goods produced in one country is shipped to another
country for future sale or trade. The sale of such goods adds to the producing nation's gross
output. If used for trade, exports are exchanged for other products or services. Exports are one of
the oldest forms of economic transfer, and occur on a large scale between nations that have fewer
restrictions on trade, such as tariffs or subsidies. Most of the largest companies operating in
advanced economies will derive a substantial portion of their annual revenues from exports to
other countries. The ability to export goods helps an economy to grow by selling more overall
goods and services. One of the core functions of diplomacy and foreign policy within
governments is to foster economic trade in ways that benefit both parties involved.
Researcher used different tools to find the relationship between FDI, Export and Economic
Growth. Growth of GDP is very much dependent on investment and exports. Exporting a large
number of goods and services and with the help of FDI the host country is able to increase their
growth rate. The main purpose of this study is to investigate how FDI and Exports is affecting
the Economic Growth of Pakistan, India and Bangladesh. The idea of economic growth is to
identify weather FDI and Exports are the important components of Economic improvement. The
distribution of goods and services with the good transportation system is also important part of
economic improvement. A large amount of FDI and foreign exchange transactions is transferring
the national borders very rapidly.
41

Arshad& Ali, (2011), they examine the long run relation study about the GDP growth and the
FDI. The research methodology is based on the use of panel co integration technique and data is
collected over the period of 1981-2008. The results of the study show that FDI support
productivity in the primary and services sectors. The investigation also provides important
information to policy makers in developing new investment policies in Pakistan.
According to Djurovic, (2012) Foreign Direct Investments (FDIs) have strategic influence on
transfer of information, technical improvement, increase in production and economic growth of
host economies. The study examines the impact of Foreign Direct Investments inflow on the
economic growth in developing countries. The study uses time series analysis of quantitative
data from official sources, Ten years data from 2000 to 2010 use as sample from the developing
countries. The results shows that Foreign Direct Investment help host countries to improve their
quality of governance and higher availability of educated labor.
Barua, (2013), stated that financial planner and policy maker gives very importance to Foreign
Direct Investments in the development and economic growth of the host country. The study
analyzes the most important benefits connected with the inflow of FDI for the host country in the
form of Export. Twelve years data is collected from 2000 to 2012. The results show a positive
correlation between FDI, GDP and Exports. The results based on Simple Regression, Multiple
Regression, ANOVA and Durbin-Watson test.

42

Chapter 3:
Data and Methodology:
This chapter describes the data set and methodology employed in the empirical analyses, and
also provides the justification for the selection of variables. The variables are selected for FDI
and export on economic growth. The relationship has between foreign direct investment and
export on economic growth 1994 to 2013 using time series data.

3.1 Data set:

This study is based on a data collected from the world development indicator (WDI) World
Bank. The data set consist of a cross-section of countries observed in a series of years, so the
data set refers to an unbalanced panel of 6 countries as classified by world bank

3.2 Time period:

The data used from 1994 to 2013. The data is derived from WDI. All data is used time series and
panel. This study has chosen 1994 to be the initial year to collect the data.

3.3 Selection of countries:

Total six countries used for this study as classified by World Bank. These countries are
1.
2.
3.
4.
5.
6.

43

Pakistan
India
Bangladesh
Indonesia
Malaysia
Sri Lanka

3.4 Proxy measures for economic development:

First proxy is foreign direct investment (FDI) on GDP show positive and significant effect on
economic growth. Second proxy is export on GDP. Export shows the positive and significant
effect on GDP. All variables are stationary.

3.5 Research Methodology:

Chapter 4 shows the methodology impact of foreign direct investment, export on economic
growth. The data derived from WDI and tests apply through Eviews software to check the impact
of foreign direct investment and export on economic growth. This study shows the long run
relationship between dependent variables and independent variable. GDP is the dependent
variables and FDI and export are independent variables.

3.6 Model:
GDP= 1 FDI + 2 Export + et
= Coefficient of the independent variables.
GDP= Stand for gross domestic product.
FDI = Stand for foreign direct investment.
EXPT= Stand for export.
et =

error term

3.7 Gross domestic products:

GDP is the dependent variable. GDP show the gross domestic production of six countries. It
shows the growth of countries.

44

3.8 Foreign direct investment:

FDI is an independent variable. FDI show the foreign direct investment of the country. FDI
shows the stationary, positive and significant impact on economic growth.

3.9 Export:
Export is the independent variable which shows the positive and significant impact on economic
growth. If export will increase then growth of all countries also increases if export will decrease
then growth of all countries also decreases.

3.10 Research method:

A proper research design is important for completing the research objectives of different
countries. The research is an observed study with the combination of the quantitative and
qualitative approaches through WDI website. To collect the data by using qualitative approach
like world indicator development (WDI) Using data in percentage and period from 1994 to 2013.
Three variables are selected to analyze the impact of foreign direct investment and export on
economic growth. These variables are divided dependent and independent variables. GDP is the
dependent variable and FDI and export and independent.

3.11 Analysis plan:

In analyzing the dataset the following test are expected to be employed. Unit root test apply for
stationary, descriptive statistic, Husman and random effect model. In all statistic tests value is not
more than 0.05 level of significant. Qualitative and quantitative methods enable the research to
test the relationship between the dependent and independent variables using statistical
techniques.

45

3.12 Panel data analysis:

The panel data have been used in order to show the impact of foreign direct investment and
export on economic growth. We go for panel data analysis when we used cross sectional and
time series data exist simultaneously. There are four models in panel data analysis. Descriptive
effect, random effect, unit root and husman test.
In which I used the some test apply for my study. These tests are given below.

3.13 Descriptive statistic:

Descriptive statistic a set of brief descriptive coefficients that summarizes a given data set, which
can either be a representation of the entire population or a sample. In that descriptive statistics
aim to summarize a sample, rather than use the data to learn about the population that the sample
of data is thought to represent this generally means the descriptive statistics. Some measures that
are commonly used to describe data sets are measures of central tendency include mean, median
and mode while measure of variability includes the standard deviation and the minimum and
maximum value of variable.

3.14 Unit root:

A unit root test is a statistic test for the proposition that in an autoregressive statistical model of a
time series, the autoregressive limit is one. A unit root test would be a test of the hypothesis that
H0 is usually against the alternative that the value is less than 0.05.

3.15 Random effect model:

The random effect is used where some omitted variables may be constant over time but fluctuate
between cases others may be fixed between cases but vary over time. The random effect model is
a special case of the fixed effect model. Fixed and random effect model to respectively refer to
the population average and subject specific effects.

46

3.16 Hausman test:

It is not easy to make decision about the accurate and authentic results after applying fixed and
random effects. To choose one best test we have the choice of Hausman test. As a result, to
decide between a random eect and xed eect model, researchers often depend upon the
Hausman test.

Chapter 4:
Data Analysis:
Table 1:

47

4.1 Descriptive Statistics:

Standar
Variable

Mean

Median

Minimu

Maximu

Deviatio

n
GDP

FDI

3.67085

3.98642

1.54687

1.13862

EXPOR

35.1032

3.018613 -14.38515

9.171481

1.456627

-2.75744

5.829392

22.9444

31.55618

9.001544

121.3118

Interpretation:
This table shows the descriptive statistics of the data. In this descriptive statistics of the data we
can see that the total number of years is 20 for all variables. There are three variables foreign
direct investment, Gross domestic product and Export. For GDP the data is for 20 years and it
show the minimum value of GDP -14.38515 and the maximum value is 9.171481 while the mean
value is shown to be 3.670856. The standard deviation for GDP 3.018613 is the given data. We
use 20 years data of FDI and it shows that the minimum value of FDI is -2.75744 and the
maximum value is 5.829392 while the mean value shown to be 1.546878. The standard deviation
of FDI is 1.456627. For Export the data is for 20 years and its shown the minimum value is
9.001544 and the maximum value is 121.3118 while the mean value is shown to be 35.10323.
The standard deviation for export is 31.55618 in the given data. So, if we observe then in the
response rate for the variable FDI value of standard deviation is 1.456627 which is the lowest

48

value as compare to other variables value. But if we observe the value of export rate is 31.55618
which is high as compare to other variables.

4.2 Unit Root Test:

In this study we use unit root test to check that data is stationary or non stationary. Unit root test
can be defined as; a unit root is a feature of processes that evolve through time that can cause
problems in statistical inference involving time series models. A linear stochastic process has a
unit root if 1 is a root of the processs characteristic equation. Such a process is non-stationary.
Stationary is the important to estimation applying least square regression or non-stationary
variables can gives misleading parameters estimate of the relationship between variable.
Checking for stationary can also be important for forecasting it can tell us about what kind of
processes we will have into our models in order to make accurate predictions.(Diebold & Kilian,
1999).

Table 2:

Unit Root Test

Series

Method

Statistic

Prob

Cross-Sections

Levin, Lin & Chu

-3.85142

0.0001

Im, Pesaran and Shin W-stat

-3.28791

0.0005

GDP

49

Levin, Lin & Chu

-2.74208

0.0031

Im, Pesaran and Shin W-stat

-2.96545

0.0015

(D)

Levin, Lin & Chu

-8.19881

0.000

EXPORT

Im, Pesaran and Shin W-stat

-7.17131

0.000

FDI

In table 1 the result of unit root test shows that all variable are stationary at level because all
probability value is (0.000) which is less than 0.05. The above pool unit root test shows the effect
of foreign direct investment and export on economic growth of different countries. Independent
variables are foreign direct investment and export. Dependent variable is economic growth.

Table 3:

4.3 Random effect model:

50

Variable

Coefficient

Std. Error

t-Statistic

Prob.

3.982756

0.933641

4.265831

FDI

1.135594

0.208453

5.447724

EXPORT

0.058927

0.018344

-3.212252

0.0017

R-squared

0.227735

Durbin-Watson stat

1.632259

F-statistics

17.25123

Interpretation:
This table shows the result of Random effect model. FDI plays a positive and significant role on
GDP, and EXPT also shows the positive and significant relationship with GDP. The value of Fstatistic is greater than 5 which mean that this model is significant. Durbin Watson value is
1.632259 which shows that auto correlation does not exist. The R square value is 0.2277 that is
22.77%. It shows that the 22.77% change in GDP is made by these two independent variables
(FDI and EXPT).
Table 4:

4.4 Hausman Test:

Correlated Random Effects - Hausman Test

Test Summary

Chi-Sq.

Prob.

Statistic
Cross-section random

3.164433

0.2055

Interpretation:
In hausman test prob. Value is 0.2055 which is greater than 0.005. So it shows that random effect
model is appropriate.

Descriptive Statistics

4.5 Table 5:

Pakistan

GDP

51

FDI

EXPT

1.76765

1.31052

14.72211

1.5229

1.1386

14.94155

Mean
Median

5.7453

3.6683

16.9031

-1.6424

0.3827

12.3823

1.895883

0.959459

1.579533

5.307815

1.27017

16.74049

5.6008

0.97255

16.1208

8.8436

3.546

25.1626

2.1227

0.2923

9.7177

2.137645

0.830122

5.578219

3.95861

0.609835

15.14788

3.9893

0.67125

15.42335

5.8975

1.2617

20.1616

1.8925

0.005

9.0015

1.128995

0.405123

3.054565

Maximum
Minimum
Std. Dev
Mean

India

Median
Maximum
Minimum
Std. Dev

Bangladesh

Mean
Median
Maximum
Minimum
Std. Dev

52

3.11122

1.04428

30.89327

4.098467

1.475477

29.622

6.706086

2.916115

52.96814

-14.3852

-2.75744

23.74301

4.409566

1.63084

7.147383

Mean

Indonesia

Median
Maximum
Minimum
Std. Dev
3.157393

3.718408

101.9965

3.703514

3.872615

102.834

7.237312

5.829392

121.3118

-9.63542

0.056694

81.67985

3.93885

1.503601

12.2297

4.72245

1.32807

31.11914

4.782549

1.180137

34.23319

9.171481

2.849577

39.01571

0.052151

0.429754

21.32837

2.044692

0.500993

6.022018

Mean

Malaysia

Median
Maximum
Minimum

Sri Lanka

Std. Dev
Mean
Median
Maximum
Minimum
Std. Dev
53

Interpretation:
In Pakistan the amount of mean with the reference to gross domestic product is 1.76765, foreign
direct investment is 1.31052, and export is 14.72211. The amount of median with the reference
to gross domestic product is 1.5229, foreign direct investment is 1.1386, and export is
14.94155.The amount of maximum with the reference to gross domestic product is 5.7453,
foreign direct investment is 3.6683, and export is 16.9031.The amount of minimum with the
reference to gross domestic product is -1.6424, foreign direct investment is 0.3827, and export is
12.3823. The amount of standard deviation with the reference to gross domestic product is
1.895883, foreign direct investment is 0.959459, and export is 1.579533.
In India the amount of mean with the reference to gross domestic product is 5.307815, foreign
direct investment is 1.27017, and export is 16.74049. The amount of median with the reference
to gross domestic product is 5.6008, foreign direct investment is 0.97255, and export is
16.1208.The amount of maximum with the reference to gross domestic product is 8.8436,
foreign direct investment is 3.546, and export is 25.1626.The amount of minimum with the
reference to gross domestic product is 2.1227, foreign direct investment is 0.2923, and export is
9.7177. The amount of standard deviation with the reference to gross domestic product is
2.137645, foreign direct investment is 0.830122, and export is 5.578219.
In Bangladesh the amount of mean with the reference to gross domestic product is 3.95861,
foreign direct investment is 0.609835, and export is 15.14788.The amount of median with the
reference to gross domestic product is 3.9893, foreign direct investment is 0.67125, and export is
15.42335.The amount of maximum with the reference to gross domestic product is 5.8975,
foreign direct investment is 1.2617, and export is 20.1616.The amount of minimum with the
reference to gross domestic product is 1.8925, foreign direct investment is 0.005, and export is

54

9.0015. The amount of standard deviation with the reference to gross domestic product is
1.128995, foreign direct investment is 0.405123, and export is 3.054565.
In Indonesia the amount of mean with the reference to gross domestic product is 3.11122, foreign
direct investment is 1.04428, and export is 30.89327.The amount of median with the reference to
gross domestic product is 4.098467, foreign direct investment is 1.475477, and export is
29.622.The amount of maximum with the reference to gross domestic product is 6.706086,
foreign direct investment is 2.916115, and export is 52.96814.The amount of minimum with the
reference to gross domestic product is -14.3852, foreign direct investment is -2.75744, and
export is 23.74301. The amount of standard deviation with the reference to gross domestic
product is 4.409566, foreign direct investment is 1.63084, and export is 7.147383.
In Malaysia the amount of mean with the reference to gross domestic product is 3.157393,
foreign direct investment is 3.718408, and export is 101.9965.The amount of median with the
reference to gross domestic product is 3.703514, foreign direct investment is 3.872615, and
export is 102.834.The amount of maximum with the reference to gross domestic product is
7.237312, foreign direct investment is 5.829392, and export is 121.3118. The amount of
minimum with the reference to gross domestic product is -9.63542, foreign direct investment is
0.056694, and export is 81.67985.The amount of standard deviation with the reference to gross
domestic product is 3.93885, foreign direct investment is 1.503601, and export is 12.2297.
In Sri Lanka the amount of mean with the reference to gross domestic product is 4.72245,
foreign direct investment is 1.32807, and export is 31.11914.The amount of median with the
reference to gross domestic product is 4.782549, foreign direct investment is 1.180137, and
export is 34.23319.The amount of maximum with the reference to gross domestic product is
9.171481, foreign direct investment is 2.849577, and export is 39.01571. The amount of
minimum with the reference to gross domestic product is 0.052151, foreign direct investment is
0.429754, and export is 21.32837.The amount of standard deviation with the reference to gross
domestic product is 2.044692, foreign direct investment is 0.500993, and export is 6.022018.

55

Chapter 5
5.1 Discussion of result
To analyze the result of this study we used three variables gross domestic product (GDP) is
dependent variable and export and foreign direct investment (FDI) are independent variables.
The results of the study are very attractive the result obtained by other researchers on the
relationship between economic growth and the export and (FDI) foreign direct investment in
different countries. In this study foreign direct investment and gross domestic product are
56

positive and significant relationship and same as export and gross domestic product. Data was
collected from the world development indicators for the time series 1994 to 2013, after collecting
the data we apply different test in Eviews software to analyze the results.
Mamun and Nath (2004) examine time series evidence to investigate the link between export and
economic growth in different countries. Using quarterly data for a period from 1976 to 2003 they
find that industrial production and export are co integrated. By focusing only export they dont
take into account the full effects of trade liberalization.
In the globalization era when the value of time is most important the need of wide supper
communication facilities is becoming most important. For the capacity of communication
facilities we employed two variables, namely, number of Tele visions and number of Tele
phones. The effects of expansions in communication facilities are positive and both the variables
turned out to be significant. Thus expanding the net of such facilities is helpful in exploration of
new international markets. Further, these make easy to access the world markets. As developing
countries exports are concentrated in few markets they can reap the benefits of global
communication facilities. The results are in line with Kumar (1998). The results show that
increase in savings significantly contributes to exports. Higher savings imply lower interest rates
that promote investment opportunities. The investment is the key channel for export growth. In
developing countries government provide many incentives for export promotion strategies. The
domestic investment take place indifferent sectors but it is much responsive in trade sector to
incentives provided by government. After the activism of WTO developing countries are
enhancing export oriented investment schemes. These are the arguments that support our
hypotheses of investment led export growth. The empirical results also support our hypotheses.
Over and above, savings are the source of removal of internal and external gaps in developing
countries. As two-gap theory explains saving-investment and exports-imports gaps in developing
countries, large savings are the source of removal of domestic gap that in turn remove external
gap by enhancing export growth.
In the descriptive statistics of the data we can see that the total number of years is 20 for all
variables. We use 20 years for gross domestic product data and it shows that the minimum value
57

of gross domestic product is (-14.38515) and the maximum value is (9.171481) while the mean
value is shown to be (3.670856). The standard deviation for gross domestic product is
(3.018613) in the given data. For export the data is for 20 years and its shown that the minimum
value of export is (9.001544) and the maximum value is (121.3118) while the mean value is
shown to be (35.10323). The standard deviation for is (31.55618) in the given data. For foreign
direct investment data is for 20 years and it show that the minimum value of foreign direct
investment is (-2.75744) and the maximum value is while the mean value is shown to be
(5.829392). The standard deviation for foreign direct investment is (1.456627) in the given data.
So if we observe then in the response rate for the variable foreign direct investment, value of
standard deviation is the lowest value as compare to other variable value. But if we observe the
value of export rate is (31.55618) which is quite high as compare to other two variables.
Table 2 shows the unit root test, I used panel data which is derived from world development
indicator (WDI). Which show the value of Levin, Lin & Chu of gross domestic product is 0.0001
probability value which is less than 0.005 and Im, Persaran and Shin W-stat is 0.0005 probability
value which is less than 0.05. The value of Levin, Lin & Chu of FDI is 0.0031 probability value
which is less than 0.005 and Im, Persaran and Shin W-stat is 0.0015 probability value which is
less than 0.05. The value of Levin, Lin & Chu of export is 0.0000 probability value which is less
than 0.005 and Im, Persaran and Shin W-stat is 0.0000 probability value which is less than 0.05.
All probability value is less than 0.05 which show that all data is stationary and significant.
Table 3 shows that random effect model. This table shows the result of Random effect model.
Foreign direct investment plays a positive and significant role on gross domestic product, and
export also shows the positive and significant relationship with gross domestic product. The
value of F-statistic is greater than 5 which mean that this model is significant. Durbin Watson
value is 1.632259 which shows that auto correlation does not exist. The R square value is 0.2277
that is 22.77%. It shows that the 22.77% change in gross domestic product is made by these two
independent variables first one is foreign direct investment and second one is export.
Table 4 shows the husman test. In husman test probability value is 0.2055 which is greater than
0.005. So it shows that random effect model appropriate.
58

Table 5 shows the individual descriptive statistic of every country. In Pakistan the value of mean
with the reference to gross domestic product is 1.76765, foreign direct investment is 1.31052,
and export is 14.72211. The value of median with the reference to gross domestic product is
1.5229, FDI is 1.1386, and export is 14.94155.The value of maximum with the reference to gross
domestic product is 5.7453, foreign direct investment is 3.6683, and export is 16.9031.The value
of minimum with the reference to gross domestic product is -1.6424, foreign direct investment is
0.3827, and export is 12.3823. The value of standard deviation with the reference to gross
domestic product is 1.895883, foreign direct investment is 0.959459, and export is 1.579533.
In India the value of mean with the reference to gross domestic product is 5.307815, foreign
direct investment is 1.27017, and export is 16.74049. The value of median with the reference to
gross domestic product is 5.6008, foreign direct investment is 0.97255, and export is
16.1208.The value of maximum with the reference to gross domestic product is 8.8436, foreign
direct investment is 3.546, and export is 25.1626.The value of minimum with the reference to
gross domestic product is 2.1227, foreign direct investment is 0.2923, and export is 9.7177. The
value of standard deviation with the reference to gross domestic product is 2.137645, foreign
direct investment is 0.830122, and export is 5.578219.
In Bangladesh the value of mean with the reference to gross domestic product is 3.95861, foreign
direct investment is 0.609835, and export is 15.14788.The value of median with the reference to
gross domestic product is 3.9893, foreign direct investment is 0.67125, and export is
15.42335.The value of maximum with the reference to gross domestic product is 5.8975, foreign
direct investment is 1.2617, and export is 20.1616.The value of minimum with the reference to
gross domestic product is 1.8925, foreign direct investment is 0.005, and export is 9.0015. The
value of standard deviation with the reference to gross domestic product is 1.128995, foreign
direct investment is 0.405123, and export is 3.054565.
In Indonesia the value of mean with the reference to gross domestic product is 3.11122, foreign
direct investment is 1.04428, and export is 30.89327.The value of median with the reference to
gross domestic product is 4.098467, foreign direct investment is 1.475477, and export is
29.622.The value of maximum with the reference to gross domestic product is 6.706086, foreign
59

direct investment is 2.916115, and export is 52.96814.Thevalue of minimum with the reference
to gross domestic product is -14.3852, foreign direct investment is -2.75744, and export is
23.74301. The value of standard deviation with the reference to gross domestic product is
4.409566, foreign direct investment is 1.63084, and export is 7.147383.
In Malaysia the value of mean with the reference to gross domestic product is 3.157393, foreign
direct investment is 3.718408, and export is 101.9965.The value of median with the reference to
gross domestic product is 3.703514, foreign direct investment is 3.872615, and export is
102.834.The value of maximum with the reference to gross domestic product is 7.237312,
foreign direct investment is 5.829392, and export is 121.3118. The amount of minimum with the
reference to gross domestic product is -9.63542, foreign direct investment is 0.056694, and
export is 81.67985.The value of standard deviation with the reference to gross domestic product
is 3.93885, foreign direct investment is 1.503601, and export is 12.2297.
In Sri Lanka the value of mean with the reference to gross domestic product is 4.72245, foreign
direct investment is 1.32807, and export is 31.11914.The value of median with the reference to
gross domestic product is 4.782549, foreign direct investment is 1.180137, and export is
34.23319.The value of maximum with the reference to gross domestic product is 9.171481,
foreign direct investment is 2.849577, and export is 39.01571. The value of minimum with the
reference to gross domestic product is 0.052151, foreign direct investment is 0.429754, and
export is 21.32837.The value of standard deviation with the reference to gross domestic product
is 2.044692, foreign direct investment is 0.500993, and export is 6.022018.

60

Chapter 6:
Conclusion and Recommendation:
6.2 Findings:
Result shows that foreign direct investment and gross domestic production have positive
and significant relationship.
In this study positive and significant relationship between export and gross domestic
production.
Finds that FDI has a positive impact on economic growth in less develop countries using
an export promoting policy but not in these countries using an import substitution policy.
This finding can be the exports raise motivations define knowledge of the economy
complemented by the scale benefices.
These finding recommend that countries volume to growth on economic development
will depend on her performance in attracting FDI. Countries external looking
development strategy should include FDI as a necessary part in calculating the export
raise strategy.
The findings of this study are beneficial for international organization for migration,
government, central bank, financial analysts, research and students of developing
countries for making effective decisions regarding FDI and export.

6.2 Limitations and delimitations:

In this study only secondary data use which collect from world development indicator of
different countries.
In this study we used panel data from 1994 to 2014.

61

 In this study we apply selective test only.

In the collection of data we only use WDI website.

6.3 Summery

The purpose of the study is to analyze the impact of foreign direct investment (FDI) and export
(EXPT) on the economic growth using panel data of six countries. For this purpose the study
used a sample of panel observations for 6 developing countries over the period 1994-2013. The
data are derived from the World Development Indicators (WDI). The growth rate of GDP has
been used as dependent variable as the representative of economic growth. The foreign direct
investment and export has been used as independent variables. Following panel data model, we
apply Random effect model to clearly analyze the impact of foreign direct investment and export
on economic growth of Pakistan, India, Bangladesh, Indonesia, Malaysia and Sri Lanka.

The analysis shows that result are statistically significant. First of all we are using the unit root
test to check the stationary and non-stationary level and find that all variable are stationary.
Secondly we apply the descriptive statistic test to check the minimum and maximum value of
data. In third number we apply random effect model, the result of random effect model shows
that FDI and EXPT has positive and significance effect on gross domestic production (GDP).
The coefficients of FDI and EXPT are statistically significant and coefficients are positive as
they were expected.
The impact of foreign direct investment on economic growth is more statistically significant if
we compare with export. The overall result shows these facts and we come to the conclusion that

62

it is needed to improve the export and increase the foreign direct investment to improve
economic growth and welfare of these country.
In this study we included most important variables to analyze the impact of foreign direct
investment and export on Gross domestic production on the basis of theoretical narrations, yet in
future studies it would be useful to increase the number of observations and also include some
other variables in the analysis as well. Inclusion of other variables e.g. import, remittance etc
may improve the value of the coefficient of determination.

6.4 Conclusion:
The objective of this study is to find out the impact of foreign direct investment and export on
gross domestic product. The effect of export and FDI on GDP in developing countries is very
important; its also use to determine the relationship between export and FDI with GDP. In this
study we used panel data of six countries over the period 1994 to 2013. The data are derived
from the world development indicator (WDI). In this study the result shows that foreign direct
investment show the positive and significance relationship with the gross domestic production in
the same way export show the positive and significance relationship with the gross domestic
production. When exports are increase gross domestic productions also increase. All variable are
stationary. After the Second World War the foreign direct investment has gained significant role
in the international economy both host and foreign countries take interest in foreign investment
because both have some objectives. These objectives of the foreign investors naturally to earn
high profit and send back it to their home countries. The host developing countries are interested
to increase the level of economic growth in order to improve social welfare of the community.
The present research work is an attempt to investigate the long run co-integrating relationship
among foreign direct investment, export and gross domestic products to analysis the long run
relationship. In the long run relationship gross domestic production is dependent variable and
63

export and foreign direct investment are independent variable does have significant impact on
gross domestic products in the host countries. The economic development can increase the
foreign direct investment so it can create more employment in the country. Advance technology
can improve the labor skill, demand and consumer satisfaction so foreign direct investment is the
positive and significant effect on economic growth. But there is a negative effect on domestic
production because they lose their market power, since the foreign investor become monopolistic
in the market. There is the long run relationship between the dependent variable and independent
variable. Economic development of the countries can be achieved by encouraging more foreign
direct investment which can help to create more employment in the developing countries.
Foreign direct investment provides more needed resources to developing countries such as
capital, human skill, technology, managerial skill, entrepreneurial ability, brand and access to
market. Countries should take some actions to improve the levels of foreign direct investment
directly or to private sector to improve its economic growth rate. Exports put a positive impact
on the economic growth of the home country. Exports depend on the economic condition and
economic rules of the home country. According to this study exports effected the GDP
growth positively.
This study is shown only for the impact of export earnings instability on economic growth for
Pakistan, India, Bangladesh, Indonesia, Malaysia and Sri Lanka. The export may motivate the
country to import high value, product and technology. More over there is a need to enhance the
skills of the unskilled labor force by investing in education. Skilled human capital can proved to
be a significant contributor in economic growth by adopting new technologies of production
from FDI. Positive impact of FDI on employment and per capita income shows the expansion of
industrial sector and rise in living standard through FDI inflow.
Frequent development of GDP is a large notice indication for any country economy. The
persistent development of GDP interests the foreign investor to invest in concerned country.
GDP is main variable for foreign direct investment and export.

64

So finally conclude that the positive and significant impact of export and foreign direct
investment on economic growth and long run relationship between foreign direct investment,
export and economic growth.
In Bangladesh FDI plays a very important role in attaining estimated economic growth. FDI
flows have been successful in increasing GDP. At the same time, FDI has also made an input in
improving the salary level of Bangladesh. FDI can ensure Bangladesh to understand advanced
development by having the abilities of all the resources to the fullest possible.

6.5 Recommendation:
This study can explain the relationship between FDI, export and economic growth. We
recommend that foreign direct investment increase in future in developing country. So growth
will be increase automatically. FDI can increase the human capital and modern skill. FDI also
increase growth in developing county in future and provide positive effect on economic growth.
There is a common believe that the educated work force can improve the growth of developing
and developed country. FDI has negative effect if the country is poor and FDI has positive effect
if the country is rich. FDI depends on the level of highly educated human capital.
The work is based on the more recent data set that cover longer period of time and on the
estimates from panel approach as well as individual country regression with time series data. The
result highlighted the importance of FDI and export in order to enhance economic growth.

65

FDI is more effective export oriented countries than import substituting so FDI is positive effect
in future. The impact of FDI in the host countries are usually believed to be increase in the
employment, boost in the productivity expand the export and improved pace of transfer of
technology so expand the market size of developing country and produce goods in foreign
country. The question is that whether market or government failures are more expensive for the
economy growth and progress. Foreign investments provide the jobs creation requirements,
income creation, utilized national savings productivity and complete process of economic
growth. The FDI brings more desirable physical, human capital, developed and transfer of new
technology, administrative and marketing talents and skill, international best practices of doing
business as well as increase competition in local market. FDI contribute in more jobs
opportunities to the local economy by directly creating new jobs for the employees. When local
spending increase due to purchase of goods and services by the new enhance in employees of
south Asian countries. It needs effective and encouraging FDI attractive policies from the public
sector to restore the confidence of the investor. Government should offer business friendly
environment as it provides pace to attractive huge foreign direct investment.
The comparative study has been done to analyze the relationship between GDP export and FDI
for six countries. The results from the comparative analysis are not the same for all countries.
Since each country is at a different level of development and has followed different polices to
attain the present level of development.

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