IMPACT OF FOREIGN DIRECT INVESTMENT AND DOMESTIC INVESTMENT ON THE PHILIPPINES GDP PER CAPITA

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A Thesis Presented to the College of Commerce and Business Administration University of Santo Tomas

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In Partial Fulfillment Of the Requirements for the Degree Bachelor of Science in Commerce, Major in Economics

________________ By Letran, Jennifer Hao, Marigold Quiambao, Ana Katrina

Certificate of Originality

We hereby declare that this submission is our own work to the best of our knowledge and belief. It contains no material previously written or published nor any composition in which have been accepted for an award from any other degree of a university or other institute of higher learning except where due acknowledgement is made in the text We also affirm that the intellectual content of this thesis is the product of our own efforts even though we may have received assistance from others on style, presentation, and language expression.

LETRAN, JENNIFER

HAO, MARIGOLD

QUIAMBAO, ANA KATRINA M. September, 2008

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Approval Sheet
The thesis entitled IMPACT OF FOREIGN DIRECT INVESTMENT AND DOMESTIC INVESTMENT ON THE PHILIPPINES GDP PER CAPITA

Prepared and submitted by Jennifer Letran, Marigold Hao, Ana Katrina M. Quiambao of 4e4 has been approved in partial fulfillment of the requirements in Economic research 32.

JODYLYN M. QUIJANO-ARSENIO, Ph.D Thesis adviser

Approved by the thesis committee with a final Grade of ____ on September 2008

CLARISSA RUTH S. RACHO, MDE Chair, Eco Department PROF. HELENA MA. F. CABRERA, Ph.D, DBA Dean, College of Commerce and Business Administration

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Acknowledgement

This thesis paper would not be possible without the help and support of many people. First and foremost, we would like to thank and bring back all our accomplishments to God, the Almighty Father who gave us the strength, wisdom, unity, skills and creativity that helped us withstand the responsibilities and expectations that were required of us. We would also want to express our deepest gratitude to Professor Quijano-Arsenio, for being an effective thesis adviser and for always encouraging us to do our best and to love our thesis. Furthermore, we would also like to thank Mr. Cabauatan and Ms. Baluyot for extending their knowledge in econometrics and statistics to help us better in interpreting, presenting and analyzing our data results. In addition, we offer our sincerest appreciation to our classmate, Mr. Julius Medina for unselfishly helping us in our problems in Eviews. Aside from these persons, we would also want to express our earnest gratitude to our dear parents who have always been our number one supporter and believer. Lastly, we would also like to thank all the other people that helped us in our data collection which includes, Mr. Cyrus Bautista and Mr. Ralph Garcia

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IMPACT OF FOREIGN DIRECT INVESTMENT AND DOMESTIC INVESTMENT ON THE PHILIPPINES GDP PER CAPITA

Abstract

This paper examines the effects of foreign direct investment (FDI) and domestic investment (DI) specifically on private and public domestic investment on the gross domestic product per capita (GDPp) in the Philippines for the period of 1974-2007. The study used Granger-Causality test and the results demonstrated that on the 33 observations or sample size ran out, FDI granger causes GDP and GDP granger causes the public domestic investment. Through the F-test, the ordinary least square multiple regression models between FDI and DI and the GDP per capita appeared significant which means that investment truly has an impact on a countrys GDP growth. On which type of investment has a more impact on GDP per capita, FDI appeared to be more productive than that of DI.

Keywords: Domestic Investment, Foreign Direct Investment, Gross Domestic Product

Table of Contents
PRELIMINARY PAGES Title page . Certificate of Originality. Approval Sheet Acknowledgement.. . Abstract. Table of Contents.... List of Tables. List of Figures.. 1. INTRODUCTION AND BACKGROUND 1.1. 1.2. 1.3. 1.4. 1.5. 1.6. 1.7. 1.8. Introduction .... Statement of the Problem Objectives of the Study ... Hypotheses of the Study.... Significance of the Study Theoretical Framework . Conceptual Framework .. Scope and Limitation .. 1 3 4 5 5 7 8 8 v vi ix x i ii iii iv

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1.9.

Definition of Terms ...

2. LITERATURE REVIEW 2.1. Related Literature 2.1.1. Foreign Direct Investment and Economic Growth 11 2.1.2. Foreign Direct Investment and Its Factors . 2.2. Related Studies 2.2.1. The Link between Foreign Direct Investment and Economic Growth. 13 12

2.2.2. Foreign Direct Investment and Domestic Investment. 16 2.2.3. Type of Investment that Has More Impact on Growth 2.2.4. Effects of FDI to other Economic Variables . 2.2.5. Factors that Contributes to Higher Level of Investment . 2.2.6. On Private and Public Domestic Investment.. 2.3. Synthesis . 17 18 18 19 20

3. RESEARCH METHOD 3.1. Research Design ............ 3.2. Data Collection .. 3.3. Data Treatment .. 3.4. Statistical Treatment 25 25 26 27

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4. RESULTS AND DISCUSSIONS 4.1. OLS Multiple Regression (GDP, FDI, DI). 4.2. Unit Root Test and Granger-Causality Test.... 32 37

5. SUMMARY, CONCLUSION AND RECOMMENDATIONS 5.1. Summary ... 5.2 Conclusion.. 5.3. Recommendations .. 41 42 43

APPENDICES BIBLIOGRAPHY VITAE

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List of Tables

Table 4.1 Table 4.2 Table 4.3. Table 4.3.A. Table 4.3.B. Table 4.3.C. Table 4.4

Ordinary Least Square Multiple Regression Result of GDP Per Capita 32 Ordinary Least Square Multiple Regression Result of GDP per capita 35 Unit root test .. Pairwise Granger Causality Tests of FDI and GDP per capita . Pairwise Granger Causality Tests of Public DI and GDP per capita .. Pairwise Granger Causality Tests of Private DI and GDP per capita .. White Heteroskedasticity Test . 37 38 38 39 40

List of Figure

Figure 1. Impact of FDI and DI to GDP per capita..

CHAPTER 1
INTRODUCTION AND BACKGROUND
1.1. Introduction Today, most countries focus towards industrialization and globalization. Capital through the form of investment will be much more of interest and importance compared to the other factors of production. Capital, as economists all know, constitute one of the basic factors of production. The other two is of course land and labor. Other endowments being equal, the more land, labor and capital is used, the more amount of goods is produced (Firebaugh, 1992). Such capital through investment can apparently bring more output, which is why these days; investment has played a very crucial role for every country and for every business venture. Investment has indeed become a major source of financial agent and an instrument for improving a countrys economy.

The most profound effect has been seen in developing countries where yearly foreign direct investment flows have increased from an average of less than $10 billion in the 1970s to a yearly average of less than $20 billion in the 1980s. While during the 1990s, FDI inflows exploded from $26.7 billion in 1990 to $179 billion in 1998. Moreover in the year 1999, FDI still continued to increase at an average rate of $208 billion. Driven by mergers, acquisitions and 3

internationalization of production in a range of industries, FDI into developed countries rose to $636 billion, from $481 billion in 1998 (Graham and Spaulding, 2005). Because of this ample effect, FDI in developing countries now comprises a large portion of global FDI.

Moreover, since most of the growth theories like that of Harrod-Domar, Rostows and Chenery states that capital mobility, industrialization, technological advancement and diversification are needed in order to attain economic growth, the challenge for a developing country like the Philippines is to promote and sustain such growth through capital in the form of investment so as to scale the countrys technological ladder.

Investment is always classified under domestic investment or foreign direct investment. The two types of investment have been subjected to many empirical studies that intended to prove whether which kind of investment has a greater influence on a countrys growth. According to Hirschman (1997 as cited by Firebaugh in 1992), there have been compelling reasons for expecting Third World countries to benefit less from foreign investment than from domestic investment: foreign investment is less likely to contribute to public revenues, as transnational corporations are often able to avoid taxes and when it comes to encouraging the development of indigenous industries chances appears to be very

small. On the other hand, Khawar (2005) on his study concluded that there is a large and positive relation between FDI and economic growth. In line with this, the researchers would like to investigate if previous studies (Firebaugh, 1992; Blomstrom et al., 1996; Ikamoto, 1999; Fan and Dickie, 2000; Ericsson and Irandoust, 2001; Makki and Somwaru, 2004; Roy and Van den Berg, 2006) of the effects of both foreign direct investment and domestic investments(public and private domestic investment) to growth are also true in the Philippines by using the annual data of foreign direct and domestic investments and GDP per capita from the periods of 1974-2007. Chapter 1 will provide the introduction and objectives of the study; Chapter 2 is the literature review; Chapter 3 presents the research method used while findings and conclusions are presented in Chapters 4 and 5, respectively.

1.2. Statement of the Problem

Investment especially FDI has always been studied on its relationship to economic growth. There have been a number of times where FDI have been proven to have caused an increase in the growth of an economy. However, some studies have also taken into account DI and its role for developing a country. There have also been many discussions whether which of the two types of investment, namely FDI and DI, has more impact on a countrys national output. That is why, in line with these, below is the list of problems the researchers would like to solve: 5

a) What is the impact of foreign direct investment (FDI) and domestic investment (public and private domestic investment) on our countrys GDP per capita?

b) Which of the two types of domestic investment- private and public contributes more to the GDP per capita?

c) What is the direction of causality of FDI and private domestic investment and public domestic investment to GDP per capita and vice versa?

1.3. Objectives of the Study

Following the statement of the problem presented, the following is the list of objectives that the researchers would want to cover:

a) To be able to know the relationship of foreign direct investment and domestic investment (public and private domestic investment) on the GDP per capita.

b) To be able to know which of the two types of domestic investment- private and public contributes more to the GDP per capita.

c) To determine the direction of causality of FDI and private domestic investment and public domestic investment to GDP per capita and vice versa. 6

1.4. Hypotheses of the study

1. More FDI, private and public DI contributes to higher GDP per capita.

2. Private domestic investment increases a countrys GDP per capita more compared to public domestic investment.

3.

FDI and private and public domestic investment granger causes GDP per

capita.

1.5. Significance of the Study

Foreign direct investment and domestic investment plays a vital role in a countrys growth and even development especially in the Philippines where labor is abundant and capital is scarce. More FDI and DI (public and private domestic investment) would bring more capital that would help bridge the gap between capital and labor. This study could help the government to understand that domestic investments as well as foreign direct investments are both important factors to consider for increasing the Philippines rate of economic growth. The government, through this work, can think of ways on enhancing the countrys capabilities on foreign investment and domestic investment in order to attract other countries to invest more in the Philippines. This paper could also help the

government to decide on whether the freer trade policies that they are doing for foreign investors are actually worth it or not.

The study conducted could also help the domestic firms and other industrial sectors in making investment decisions. This could help firms understand the importance of foreign direct investment since investments endow financial capital which creates new facilities that can provide new products and therefore, offering new jobs. It would also help them to realize the need for foreign investments to produce more output thereby increasing their sales. Domestic investors and foreign direct investors could work hand in hand to build a better market for the consumers. Firms would now be aware that foreign investment together with a good absorptive capacity could bring more output on their business. Moreover, this can also help entrepreneurs and managers to make decisions on whether to invest domestically or abroad.

As for the households and consumers, this study would open up their minds about the importance of foreign investments in the Philippines. It would also help these people to realize that dependence through other countries is not such a bad thing.

Lastly, this could serve as new sets of information and research tools on the academe and on the different government agencies as well.

1.6. THEORETICAL FRAMEWORK

The Harrod-Domar growth model is a functional economic relationship on which the growth rate of gross national product (g) depends directly on the national net savings rate (s) and inversely on the national capital-output ratio (k), that is g=s/k. The model takes its name from a synthesis of analyses of the growth process by two economists, Sir Roy Harrod of Britain and E.V. Domar of the United States (Todaro and Smith, 2003).

This theory relates to the researchers study since in this theory, savings and capital output ratio was used to determine the level of growth of the gross national product. Economics majors must all know that savings must equal

investment. Therefore, investment is also included in determining the level of growth of gross national product. This relates on the present study since as a developing nation, this theory could help explain if sufficient investment is what this country needs to be able to increase our GNP or GDP through GDP per capita likewise.

1.7. CONCEPETUAL FRAMEWORK

H1 & H2

FOREIGN DIRECT INVESTMENT PUBLIC DOMESTIC INVESTMENT PRIVATE DOMESTIC INVESTMENT H3 GDP PER CAPITA

Figure 1. Impact of FDI and DI (private and public domestic investment) to GDP per capita.

As presented in Figure 1, foreign direct investment and domestic investment which are private and public domestic investments are the independent variables while the GDP per capita is the dependent variable. The positive signs that can be seen on Figure 1 represent the kind of relationship that exists between the variables.

1.8. Scope and Limitation

The study would focus on the impact of foreign direct investment and domestic investments which are private and public investments on the GDP per

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capita during the period of 1974 to 2007. To know the impact of foreign direct investment and domestic investment, other factors that affect GDP per capita would be held constant. FDI and DI (private and public domestic investment) would be in terms of monetary value only and other indirect investment would not be included. The main focus of this study is the relation of foreign direct investment and public and private domestic investment on GDP per capita. The factors that affect the level of private and public domestic investment and foreign investment would not be tackled.

1.9. Definition of Terms

Below are the lists of conceptual and operational terms used on this study for better understanding of the readers of this paper.

Capital-Output Ratio - A ratio that shows the units of capital required to produce a unit of output over a given period of time (Todaro and Smith, 2003).

Foreign Direct Investment - Overseas investments by private multinational corporations (Todaro and Smith, 2003).

Gross Domestic Product - The total final output of goods and services produced by the countrys economy, within the countrys territory, by residents and

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nonresidents, regardless of its allocation between domestic and foreign claims (Todaro and Smith, 2003).

Gross National Product - The total domestic and foreign output claimed by residents or citizens of a country. It comprises gross domestic product plus factor incomes accruing to residents from abroad, less the income earned in the domestic economy accruing to persons abroad (Todaro and Smith, 2003).

Investment - The part of national income or national expenditure devoted to the production of capital goods over a given period of time (Todaro and Smith, 2003).

Savings Ratio - Savings expressed as a proportion of disposable income over some period of time (Todaro and Smith, 2003)

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CHAPTER 2
LITERATURE REVIEW
This chapter serves as an overview of the various existing works that provide concrete support with the researchers current study. This will be separated into two sections discussing literatures and studies, respectively.

2.1. RELATED LITERATURE

2.1.1. Foreign Direct Investment and Economic Growth Investment has always been a factor that a country considers for its sustainability. Throughout the years that passed, capital formation and the drive to acquire new technology has always been a countrys main objective. Several studies have proven that investment especially foreign direct investment has played key roles for the growth of an economy. Austria (1998) on her study states that during the 1990s FDI had played a big role to the sectors of the Philippine economy especially on the manufacturing sector wherein the value of FDI increased from $196M in 1990 to $1.1B in 1997. In real terms, FDI grew at an average yearly rate of 20 percent during the period 1990-1997. Cai (1999) as well, said that FDI is a source to acquire a stable supply resource, an efficient way to raise capital and an effective channel to obtain foreign technology and managerial skills. Likewise, Sun (1999) also said that among the factors 13

promoting export growth, FDI has played an important role and that importation of foreign goods especially machinery and equipment, assists fixed capital investment in China and promotes economic growth in the long run.

Then again, Li (2003) in his work also mentioned that FDI contributes to the capital formation of the host countries. FDI have also become important in accelerating the pace of the economic growth in East Asia. FDI-oriented approach to economic growth and industrialization of a developing country in East Asia is actually more sustainable and better rather that the restrictive strategies adopted by the majority of developing countries. FDI can also be a profit-generating option for the government (Mahasneh, 2003).

2.1.2. Foreign Direct Investment and Its Factors FDI have really become a good approach to sustain growth. However, many literatures emphasized the conditions that a country must have in order to benefit from the growth effects that FDI brings. China, for example has been successful on acquiring FDI since its open-door policy was introduced and since its government had made stronger commitment for further liberalization of its economic system (Cai, 1999). Political stability, easy access to huge domestic market and economic performance could also attract FDI more (Li, 2003).

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2.2. RELATED STUDIES

2.2.1. The Link between Foreign Direct Investment and Economic Growth The relationship of FDI to economic growth has always been questioned as to what extent FDI could really help in promoting growth and whether it could also help the developing countries. Rothgeb (1984) stated that the effects of foreign investment vary for differing types of third world states. New ideas and values are forced upon the host country that could create turmoil due to the condition for adjustments. Firebaugh and Beck (1994) also said that economic growth maybe ephemeral in the third world because growth based on imported capital and trade with the core is short-lived. Over the long run, dependence harms the masses in the third world by surpassing economic expansion. Similarly, Power (1998) in her study noted that there is no observable significant relationship between investment and productivity or productivity growth which was also true to the study of Podrecca and Carmeci (2001) wherein granger causality from investment shares to growth rates is found to be negative.

Kentor (1999) stressed out that those peripheral countries with relatively high dependence on foreign capital exhibit slower economic growth than those less dependent peripheral countries. He also noted that it is not true that foreign capital is attracted to areas of relatively higher economic growth since one of his

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earlier measures of GDP growth 1940-1965 did not have any significant effect on the amount of foreign investment penetration in 1967.

Recent studies have shown that FDI help in promoting growth. FDI can cause technological change to a country and hence it can also affect the economic growth by providing more income (Nigel and Pain, 1997). Fan and Dickie (2000) also states that FDI contribute to growth through several channels. An increase in FDI will, by itself, contribute to an increase in total investment and an increase in investment directly contributes to growth.

The FDI inflow can also contribute to the advancement of technology, equipment and infrastructure in the host economy. Sylwester (2005) likewise viewed FDI as a medium than can transfer productivity. Khawar (2005) also concluded that there is a large and positive relation between FDI and economic growth which is also like the previous study made by Firebaugh (1992). However, Roy and den Berg (2006) said that FDI and economic growth relationship is inherently complex. As a matter of fact the study by Zhang (2001) showed that there exists a bi-directional causality between FDI and economic growth.

The study by Berthelemy and Demurger (2000) suggested that such economic growth may also influence the inflows of foreign capital. Ericsson and Irandoust (2001) had the same findings on Sweden which resulted on a causal

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linkage between FDI growth and income growth which proves to be bi-directional in nature. Whether FDI positively or negatively affects growth, some studies stated that it depends on the characteristics of the economy and to what sector does FDI has a great impact on.

Ikamoto (1999), in his study, found out that FDI played an important role in the development of major industries in the Philippines. However, this is only true for the manufacturing sector. According to the author, although FDI tends to increase the level of productivity, it varies among the sectors in the Philippines. Alfaro (2003) likewise said that the effect of FDI depends on the sector. He said that foreign direct investments (FDI) in the primary sector tend to have a negative effect on growth, while investment in manufacturing have a positive effect. He argued that though FDI transfer great advantages on the host countries but such gains might differ across from primary, manufacturing, and services sectors.

The recent study by Qi (2007) states that FDIs effect on growth is still questionable and is affected by country conditions and characteristics. The study states that the long run equilibrium relationship of investment, FDI and growth is less frequent to be significant in developed countries than in developing countries. Second, in developed countries causal effects generally run unilaterally from growth to total investment, from growth to FDI, or from total investment to FDI, while in developing countries causal effects run in both directions. Third, the sign

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of the causal effect between growth and total investment, or between total investment and FDI is always positive in developed countries. However in developing countries, total investments interrelation with growth and FDI is sometimes negative.

The paper by Qi (2007), found out that Asia has been most successful in making domestic investment and FDI advantageous to economic growth, and Africas performance has been unsatisfactory. Additionally, the empirical results show that countries heavily dependent on petroleum export have more difficulties than other countries in benefiting from FDI, and also the role of total investment in impelling growth would be weakened in oil-exporting countries. The paper states that investments do promote growth but clearer relationship between the two still depends on the condition that a country has.

2.2.2. Foreign Direct Investment and Domestic Investment Aside from the relationship of FDI to growth, there have been also studies that states the effect of FDI to DI and vice-versa and whether which of the two crowds out the other. The study by Oneal and Soysa (1999) stated that an increase in FDI encourages greater domestic investment. A permanent increase of 1 percent in the ratio of foreign direct investment to GDP boosts the ratio of domestic capital to GDP by 2.89 percent in the long run. This means that FDI doesnt crowds out the domestic firms but instead helps them. Asheghian (2004)

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proves this in his study where FDI could increase the value-added content of FDIrelated production and could also lead to increasing returns in domestic production. Likewise, Makki and Somwaru (2004) stated that FDI stimulates DI.

Meanwhile, Desai, Foley and Hines (2005) indicated that foreign and domestic investments are complements in the American economy, whereas they are substitutes in other OECD economies. They also stated that a new finding suggests that greater foreign investment is associated with higher levels of domestic investment from the Analyses of American multinational firms. This estimated complementariness implies that firms combine home production to generate final output at lower cost than with a possible production in just one country, making each stage of the production process more profitable and more abundant. However, a study by Lee and Tcha (2004) said that FDI was found out to have no effect or positive interaction with DI for the economies they included. Other than this, FDI has either a crowding-out effect on or a positive interaction with DI.

2.2.3. Type of Investment that Has More Impact on Growth As to the type of investment that greatly affects growth, there have also been questions of which investment is more significant. Rothgeb (1984) in his study noted that investment without domestic investment would lead to only a small impact on growth. However, Oneal and Soysa (1999) stated that foreign

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capital is 2.5 times as productive as domestic investment when compared to a dollar by dollar basis. Lee and Tcha (2004) also shared the same finding but the researchers increased the role of FDI since they found out that FDI is more than four times larger than that for DI. Khawar (2005) likewise concluded that the coefficient on the foreign investment variable is considerably larger than that of domestic investment variable, suggesting a potentially large role for FDI.

2.2.4. Effects of FDI to other Economic Variables Aside from FDIs impact on growth, several studies also included some of the factors that are also affected by FDIs. Ikamoto (1999) stated that the effect of FDI with employment creation depends on whether foreign firms use more or less labor intensive technology than domestic firms. Meanwhile, a study by the impact of FDI on domestic gross fixed capital formation was said to be dependent on the underlying motivation for investment, and not simply on the growth in outward relative to inward FDI (Hejazi and Pauly, 2003). As to income inequality, Sylwester (2005) found that there was no significant relationship between the two. On the relationship of FDI to domestic savings, Katircioglue and Narliyeva (2006) found out that there exists no co-integration.

2.2.5. Factors that Contributes to Higher Level of Investment Most of the studies also stated that investment depends on the conditions and characteristics of a country as well. This is true especially when it comes to

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FDI. Zhang (2001) said that FDI is more likely to promote economic growth in countries with more liberalized trade regimes, good human capital, more macroeconomic stability and good export-promotion. Khawar (2005) stated that theres a need for a minimum human capital requirement in order for FDI to be beneficial. Vu Le and Suruga (2005) also said that too much government intervention may have a negative effect on the economys performance. Excessive government control can have a negative impact on the absorptive capacity of the economy.

Aside from this, Berthelemy and Demurger (2000) also mentioned that too much technological investments disconnected from the domestic productive sector may be adverse rather than beneficial to growth. That is why they stated that human capital also contributes by facilitating the adoption of foreign technologies. Qi (2007) also second these motions by saying that if a country wants to strengthen the relationship between FDI, total investment and growth, more liberalized policy, macroeconomic stability and better human resource are needed.

2.2.6. On Private and Public Domestic Investment According to the study of Mataya and Veenam (1996), the effect of private investment on public investment using the Granger-Causality test, and vice versa, is positive, implying that the two forms of investment are

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technologically complementary. The authors analysis of the behavior in Malawi's private and public goods sectors between 1967 and 1988 shows that public investment may compete with private investment for scarce physical and financial resources, at least in the short term. However, public investment is also expected to complement private investment by creating infrastructure and raising the productivity of private capital stock. The study also of Fisher and Turnovsky (1998) states that public investment may ultimately stimulate the private capital stock in the long-run however the effects of private investment in the short run is unclear since public investment tends to negate the attention of the private sector from capital accumulation to consumption in the said short-run period. In addition, the study also of Vijverberg and Gamble (1997) showed that a decline in public investment explains a significant portion of the decline in labor and multifactor productivity growth. Lastly, the study also of Glomm and Ravikumar (1992) stated the importance of both public and private investment as an engine for growth in the economy through human capital investment.

2.3. SYNTHESIS

FDI has a positive impact to a countrys economic performance and growth. FDI is a source of capital formation as well as it serves as a means of transferring technology, equipment and infrastructures. It provides technological spillovers to help the local industry. It even indirectly promotes welfare and also

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the quality of human capital (Barrell and Pain, 1997; Ikamoto, 1999; Cai, 1999; Sun, 1999; Fan and Dickie, 2000; Ericsson and Irandoust, 2001; Mahasneh, 2003; Borensztein et al. (1988), Dunning (1993), Blomstrom et al., (1996) as cited by Asheghian, 2004; Makki and Somwaru, 2004; Sylwester, 2005; and Roy and Van den Berg, 2006). Aside from the aforementioned studies, several other authors similarly argued that economic growth could also be a factor for more investments. Such authors like Berthelemy and Demurger (2000), Zhang (2001), Ericsson and Irandoust (2001), correspondingly said that FDI and economic growth are positively interdependent with bi-directional causality. This is true since FDI provide spillovers in technology which stimulates and promotes growth. Countries, on the other hand, provide the initiative for FDI inflows given the conditions that these countries are more liberalized and stable. Berthelemy and Demurger (2000) likewise suggest that such economic growth may conversely influence the inflows of foreign capital. According to them, productivity growth itself is an important factor in absorbing FDI inflows. Of the two types of investment, FDI or DI, several authors agreed that FDI has more impact in the economys growth (Ikamoto, 1999; Oneal and Soysa, 1999; Lee and Tcha, 2004; Le and Suruga, 2005; and Khawar, 2005). However, Rothgeb (1984) balances the overall perspective by stating that domestic investment plays a significant role in promoting growth. Therefore, if the country decides to focus on foreign investment while paying no attention to the need in promoting growth of domestic investment, the end result would only lead to little success. Other

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authors also observed the correlation of both types of investments by stating that foreign domestic investment also helps stimulate domestic investment (Makki and Somwaru, 2004 and Desai, Foley, Hines Jr., 2005). Meanwhile, Ikamoto (1999) and Alfaro (2003) both agreed that FDI has more impact on certain sectors of the economy like manufacturing. Lastly, several authors concluded that the effect of FDI depends largely on the characteristics and condition of the country (Berthelemy and Demurger, 2000; Zhang, 2001; Khawar, 2005; Vu Le and Suruga, 2005; and Qi, 2007).

However, the study by Firebaugh (1992) and Jeffrey Kentor (1998) as well as Beck and Firebaugh (1994) agreed that countries which are less developed, and with a high dependence on foreign capital, exhibit slower economic growth. Kentor (1998) said that peripheral countries growth is slower than that of those by core countries. Then again, Firebaugh (1992) attributed the slow economic growth because of the inevitable slowing of foreign investment. Similarly, Firebaugh and Beck (1994) reasoned that economic growth is ephemeral in the Third World because growth is base on imported capital and that trade with the core countries is short-lived. Similarly, Power (1998) in her study noted that there is no observable significant relationship between investment and productivity or productivity growth which was also true to the study of Podrecca and Carmeci (2001) wherein granger causality from investment shares to growth rates is found to be negative.

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To continue more, on the studies of public and private investment, most of the studies focused more on the causality between the two types of domestic invetsment and not on their impact on the countries economic growth, such studies include that of Mataya and Veenam (1996) and Fisher and Turnovsky (1998). Nevertheless, few studies also stated the importance of both public and private investment to economic growth indirectly through human capital and labor productivity on the studies of Glomm and Ravikumar (1992) and Vijverberg and Gamble (1997) respectively.

Most studies that have been mentioned especially that of Barrell and Pain (1997), Ikamoto (1999), Fan and Dickie (2000), Ericsson and Irandoust (2001), (Blomstrom et al., 1996; Borensztein et al., 1988; Dunning, 1993) as cited by Asheghian, (2004), Makki and Somwaru (2004), Sylwester (2005), and Roy and Van den Berg (2006) will aid greatly in shaping this paper since the aforementioned studies included variables that was used in this study, thereby ensuring the relevance and relation of the journals with this dissertation. Moreover, their objective to know if foreign direct investment has an impact to growth is also one of the primary reasons in conducting this research. Likewise, the study of Rothgeb (1984), Oneal and Soysa (1999), Lee and Tcha (2004) and Khawar (2005) would also help this study in determining if it is true that FDI is really more effective than that of DI. Lastly, the theoretical model provided by authors, Firebaugh (1992), Fry (1993), Intal Jr. (1997) Jurado (2003) and Canlas

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(2003) influenced this study as their statements and observations in their journals supported the researchers theoretical framework, which is centered on the Harrod-Domar Growth Model.

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CHAPTER 3
RESEARCH METHODOLOGY

3.1. Research Design

The researchers applied the correlation design in order to determine and explain whether there is a correlation between the gross domestic product per capita (GDPp) and the level of foreign direct investment (FDI) and private domestic investment (PRIVDI) and public domestic investment (PUBDI) The researchers also used the comparative research design in order to know whether the movements in the gross domestic product per capita (GDP p) is similar or different on the increase of the level of foreign direct investment (FDI) and private and public domestic investment (PRIVDI and PUBDI).

3.2. Data Collection

In gathering the needed data, the researchers used the secondary data provided by the government agencies like the National Statistical Coordination Board (NSCB) and the Philippine Institute for Development Studies (PIDS). The researchers also used the publications of the Bangko Sentral ng Pilipinas (BSP) like the Selected Economic Indicators of the Philippines (SEIP). Likewise, the researchers also used the Philippine Statistical Yearbook (PSY). 27

3.3. Data Treatment

The researchers only had the annual data for gross domestic product (GDP) in million pesos at constant 1985 prices. Since what the researchers want is the gross domestic product per capita, the researchers divided the annual population data provided by the Selected Philippine Economic Yearbook, 2007 from the annual GDP. On gathering the data for foreign direct investment, the researchers used the amount of investments based on the Central Banks approved registered foreign direct equity investment for the year 1974-2007 in US million dollars. In order to convert it into the national currency, the researchers multiplied it on the corresponding peso-dollar annual average exchange rate provided by the Selected Philippine Economic Yearbook for the said years. Lastly, in gathering the data for private and public domestic investment, the researchers used the gross domestic capital formation data of the Philippine Statistical Yearbook of 1978, 1996 and 2007 for the years 1974-2007 at constant 1985 prices in million pesos. Public domestic investment data are the governments gross value of construction. While private domestic investment are the private entities gross value of construction plus the durable equipments, breeding stock and orchard development plus the change in stocks. Lastly, FDI, private domestic investment and public domestic investment that will be use for the regression are already as their percentage share to the amount of GDP.

28

3.4. Statistical Treatment or Tool

1. To be able to determine the relationship of GDP per capita to FDI and private and public DI and which independent variable has a greater effect on the Philippines GDP growth through GDP per capita, the researchers used the ordinary least square multiple regression analysis: GDPp = bo + b1 FDI + b2 PRIVDI + b3PUBDI + et, , where GDPp is the gross domestic product per capita, FDI is the foreign direct investment, PRIVDI is the private domestic investment, PUBDI is the public domestic investment, b0 is the intercept or the value of the gross domestic product if there is no FDI and PUBDI and PRIVDI, b1, b2 & b3 is the slope coefficient of FDI, PUBDI and PRIVDI or the unit change in the GDP per capita given a unit change in FDI, PUBDI and PRIVDI and et as the error term. In line with this, the researchers also used the following tests to evaluate the models significance and also the significance of each variable:

a. To test the significance of the variables FDI and DI, the researchers used the t-test for significance,
t= g 2 g2 se( g 2 )

where, 2 is the estimated

slope

coefficient of DI or FDI and g is the actual slope coefficient of DI or FDI.

b. To test the significance of the whole regression equation, the researchers used the F-test on which the F statistic is the ratio of the explained variability (R2) and unexplained variability (1-R2). The larger the F

29

statistic, the more useful is the model. If the F-statistic is greater than the tabular value, then the null hypothesis is rejected and the alternative hypothesis will be accepted.

c. To determine if there is an autocorrelation between the variables, the researchers used the Durbin-Watson test: Durbin Watson statistic, e is the residual where d is the and t is the

time period counter. If the computed Durbin statistic is 2 or is greater than its upper critical value, then it has no positive autocorrelation. If it is less that its lower critical value, it suffers from positive autocorrelation. If the computed value is between the lower and upper critical values, then the Durbin Watson statistics is inconclusive.

d. To determine how well the independent variables, FDI and DI, explain the change on our dependent variable, GDPp the researchers will use the coefficient of determination or R2: R 2 = SSR
SST

where, R 2 is the

coefficient of determination, SSR is the explained variability or regression sum of squares and SST is the total sample variability/ total sum of squares.

30

2. To be able to know if the model the researchers will be using is stationary and if it can be used for Granger causality test, the researchers would be applying the
Y Y Y Augmented-Dickey Fuller Unit Root Test: t = +t +Yt 1 +1 t 1 +... + p t p +1 +t

where, is a constant, is the coefficient on a time trend, p is the lag order of the autoregressive process and
t

is the error term.

3. To be able to determine the direction of causality of FDI and private domestic investment and public domestic investment to GDP per capita and vice versa, the researchers will use the Granger-Causality test:
X 1 (t ) = A11 , j X 1 (t j ) + A12 , j X 2 (t j ) + E1 (t )
j= 1 p j= 1 p p p

and

X 2 (t ) = A21 , j X 1 (t j ) + A22 , j X 2 (t j ) + E2 (t )

where, p is the maximum number of lag observations included in the model, Matrix A which contains the coefficients of the model and E1 and E2 which are the residuals for each time series

j =1

j =1

4. To determine if there is a misspecification bias in the model, the researchers will use the White Heteroskedasticity Test.

31

CHAPTER 4
RESULTS AND DISCUSSIONS
This chapter of the research paper communicates in details the results of the study according to the order of objectives and hypotheses which were presented in the first chapter. Objective 1: To be able to know the relationship of foreign direct investment and domestic investment (public and private domestic investment) on the GDP per capita.

In order to test the relationship and contribution of the investment variables to the GDP per capita of the country, the ordinary least square (OLS) multiple regression estimates was used since it is the simplest method at hand and compared to the other functional forms, OLS provided the most precise and credible results (significant variables, significant model, high R-squared). The findings in Table 4.1, shows that foreign direct investment (FDI), private DI, public DI and GDP per capita are all significant since their t-statistics which is 1. 1.972872, 3.890171, 2.146915 and 14.64162, respectively, are all greater than the tabular value of t which is 1.725 at 5% level of significance with twenty degrees of freedom after it was treated. Using the p-value approach, the intercept of GDP per capita, private DI and public DI are all significant since their p-values are all less than the assumed .05 level of significance which is 0.0000, 0.0015 and

32

0.0486 respectively, while FDI was also significant at 10% level of significance with a .0672 probability. As presented in Table 4.1, the results show that as the level of FDI increase by one in its percentage share to GDP, there is an estimated increase on GDP per capita by 27326.32. On the other hand, if there is an increase of one unit in percentage share of public domestic investment and private domestic investment to GDP, GDP per capita would also increase by 12742.86 and 11986.19, respectively. There was a significant increase on the level of GDP per capita brought about by FDI, public and private domestic investment implying that indeed investment has a great impact on the countrys GDP. However, if the two types of investment are to be compared (FDI and DI) the results showed that the coefficient of FDI which is 27326.32 is greater than that of the combined private and public DI which is the whole domestic investment which is 24729.05 This is very similar to the study of Khawar (2005) where the coefficient on the foreign investment variable he used is considerably larger than that of domestic investment variable, suggesting a potentially large role for FDI. Likewise, Oneal and Soysa (1999) also stated that foreign capital is 2.5 times as productive as domestic investment when compared to a dollar by dollar basis. Lee and Tcha (2004) also shared the same finding but increased the role of FDI since they found out that FDI is more than four times larger than that for DI.

Moreover, there is an 86.45% coefficient of determination which means that almost the whole variations in the GDP per capita are greatly explained by

33

changes in both FDI and private and public DI. This coefficient of determination only means that aside from consumption and government expenditures, investment may have a bigger role in increasing a countrys economic growth. In addition, the whole model was also significant since its F probability of .000005 is also less than the assumed level of significance of .05.

Furthermore, the treated Durbin Watson statistics of 1.939222 which is greater than the upper value of the Durbin Watson statistics which is 1.812 at a level of significance of .05 means that this model has no positive autocorrelation. This is attributed to the right usage of the functional form. This also suggests that the data used are not manipulated and that the variables used were the proper ones and no important variable was excluded.

Lastly, the use also of AR (1) or the first-order coefficient of autocorrelation or the coefficient of autocorrelation at lag 1, made the model better since the researcher used it for treating the autocorrelation of the variables.

34

Table 4.1 Ordinary Least Square Multiple Regression Result of GDP per capita
Delineated Variables n=32** C FDI PRIV_DI PUB_DI AR(1) Coefficient Value t-statistic p-value

8932.327 27326.32 12742.86 11986.19 0.976258

14.64162* 1.972872* 3.890171* 2.146915* 3.601666*

0.0000 0.0672 0.0015 0.0486 0.0026

R2 Adjusted R2 F-stat Significance F (Prob)

0.86451 0.819346 19.14178 0.000005

Durbin Watson 1.939222 Note: * denotes significance at 5% (1.740 tabular values) and at 10% (1.333 tabular values); **included observations: 21, convergence achieved after 34 iterations Source: Computation based on data gathered

The significance of the model only means that investment does have a great role in contributing on the countrys economic growth through GDP per capita. This indicates that the investment brought about by other countries and the investments made by our local producers are used in the improvement of our production capabilities which may in turn; provide larger output and sales on our economy. The bigger role of FDI also proves that opening our country to trade brings us more various skills and specialization. It gives us a leeway to a more alternatives and new ways to improve our production and economy.

35

Objective 2: To be able to know which of the two types of domestic investment- private and public contributes more to the GDP per capita.

In order to know which domestic investment variables contributes more to the GDP per capita, the ordinary least square (OLS) estimate multiple regression analysis was used since it was the best functional form and it gave the most favorable results (high R-squared, significant variables, significant model). As presented in Table 4.2, if the two types of domestic investment is to be compared, private domestic investment contribution to the GDP per capita is greater than that of public domestic investment since its coefficient of 12742.86 is greater than that of the public DI which 11986.19. This means that, if there is an increase of a one unit percentage share of private domestic investment to GDP, GDP per capita would increase by 12,742.86 and if there is an increase of a one unit percentage share of public domestic investment to GDP, GDP per capita would increase by 11986.19.

Moreover, the R-squared of the model which is 86.45% means that the changes in GDP per capita are greatly explained by the changes in the amount of public and private domestic investment. The whole model was also significant, since the F-probability .000005 is also less than the assumed level of significance of .05.

36

To continue, the treated Durbin Watson statistics of 1.939222 which is greater than the upper value of the Durbin Watson statistics which is 1.812 at a level of significance of .05 also means that this model has no positive autocorrelation. Lastly, the use also of AR (1) or the first-order coefficient of autocorrelation or the coefficient of autocorrelation at lag 1, made the model better since the researcher used it for treating the autocorrelation of the variables. Table 4.2 Ordinary Least Square Multiple Regression Result of GDP per capita
Delineated Variables n=32** C FDI PRIV_DI PUB_DI AR(1) Coefficient Value t-statistic p-value

8932.327 27326.32 12742.86 11986.19 0.976258

14.64162* 1.972872* 3.890171* 2.146915* 3.601666*

0.0000 0.0672 0.0015 0.0486 0.0026

R2 Adjusted R2 F-stat Significance F (Prob)

0.86451 0.819346 19.14178 0.000005

Durbin Watson 1.939222 Note: * denotes significance at 5% (1.740 tabular values) and at 10% (1.333 tabular values); **included observations: 21, convergence achieved after 34 iterations Source: Computation based on data gathered

The larger coefficient of private domestic investment as compared to the public investment only shows that private companies invests more capital than that of the investment of the government for public capital.

37

Objective 3: To be able to know the direction of causality of FDI and private domestic investment and public domestic investment to GDP per capita and vice versa.

In order to know the direction of causality, the researchers first test the stationarity between the variables through the Augmented Dickey Fuller Test since it is a pre-requisite for the Pair-wise Granger Causality Test and since it is better to know whether the variables used in the study have been stationary on the years which the researchers have taken into account in the sample. As shown in Table 4.3., the variables are all stationary in their first difference with 0 lagged difference since the ADF tabular or critical values of GDP, FDI, private DI and public DI at 5% and 10% level of significance which are -2.9558 and -2.6164 are all less than their ADF Test Statistics which are -3.571570, -6.838219, -4.779292 and -4.998902 respectively. The results showed that the variables are all stationary which only means that these variables can now be tested and used for the Granger-Causality Test.

38

Table 4.3 Test Result of Unit root test

Delineated Factors GDP ADF Test Statistics** -3.57157 ADF Critical/Tabular Values -3.6496 1% Critical Value* -2.9558 5% Critical Value -2.6164 10% Critical Value 1% Critical Value* 5% Critical Value 10% Critical Value 1% Critical Value* 5% Critical Value 10% Critical Value -3.6496 -2.9558 -2.6164 -3.6496 -2.9558 -2.6164 -3.6496 -2.9558 -2.6164

FDI

-6.838219

PRIV_DI

-4.779292

PUB_DI

1% Critical Value* 5% Critical Value 10% Critical Value Note: *MacKinnon critical values for rejection of hypothesis of a unit root. **ADF Test Statistics at First Difference and with "0" lagged difference

-4.998902

As shown in Table 4.3.A, the researchers test if FDI granger causes GDP or vice-versa and the results showed that in fact FDI does granger causes GDP at 10% level of significance since the probability is only .08586 which is lesser. This indicates that a countrys foreign direct investment is a huge factor to consider in boosting the countrys GDP. These results are true since recent studies have shown that FDI really helps in promoting growth. FDI can cause technological change to a country and hence it can also affect the economic growth by providing more income (Nigel and Pain, 1997). Fan and Dickie (2000) also states that FDI contribute to growth through several channels. An increase in FDI will, by itself, contribute to an increase in total investment and an increase in investment directly contributes to growth. Sylwester (2005) likewise also viewed 39

FDI as a medium than can transfer productivity. Khawar (2005) also concluded that there is a large and positive relation between FDI and economic growth which is also similar to previous study made by Firebaugh (1992). Table 4.3.A Pairwise Granger Causality Tests of FDI and GDP per capita
Null Hypothesis FDI does not Granger Cause GDP GDP does not Granger Cause FDI Note: *significant at 10% level of significance Source: Computation based on data gathered. F-Statistic 2.87339 0.95207 Probability 0.08586* 0.40675

The result means that the government is advised to keep on making better trade policies in order for FDI to continue to increase and bring beneficial effects in the Philippines. To continue, as shown in Table 4.3.B., a test was made whether public DI granger causes GDP or not and the results showed that GDP granger causes public DI and not the other way around since the probability of GDP which is .09606 is less than the 10% level of significance. This means that the governments will to provide public investment is really dependent to the level also of our GDP. Table 4.3.B Pairwise Granger Causality Tests of Public DI and GDP per capita
Null Hypothesis PUB_DI does not Granger Cause GDP GDP does not Granger Cause PUB_DI Note: *significant at 10% level of significance Source: Computation based on data gathered. F-Statistic 0.62177 2.72196 Probability 0.54948 0.09606*

40

The finding suggests that it is undoubtedly true that a countrys characteristics are also considered as a factor for the government to decide whether to invest for public goods. Lastly, the researchers also intend to know if private investment also affects the GDP per capita. And so, as shown in Table 4.3.C. below, neither of the two causes each other. This may be because of the fact the private investment is independent on the GDP per capita since mostly, private investors decision to invest also depends on their financial capability unlike that of public investment where the government must rely also to the countrys performance. Table 4.3.C Pairwise Granger Causality Tests of Private DI and GDP per capita
Null Hypothesis PRIV_DI does not Granger Cause GDP GDP does not Granger Cause PRIV_DI Note: *significant at 10% level of significance Source: Computation based on data gathered. F-Statistic 0.14905 1.63552 Probability 0.86271 0.22580

Here, since FDI granger causes GDP per capita and GDP per capita granger causes public DI, the result denotes that through technological advancement and advanced skills, FDI affects GDP per capita. This reason is considered to be the basis why there are spillovers of the effects of FDI to GDP and GDP to public DI consequently. When FDI affects GDP, GDP per capita tends to increase and if GDP per capita increases, there is a high probability that the government will find it profitable to also invest public goods in the country

41

since the gross domestic product per individual is increasing which means that there is a greater consumer spending and consumer confidence.

Lastly, to test if there exists such misspecification bias in the model, the researchers used the White Heteroskedasticity Test. As shown in Table 4.4, the model has no misspecification since the probability of 0.019872 is less than the assumed 5% level of significance.

Table 4.4 White Heteroskedasticity Test

White Heteroskedasticity Test F-statistic 3.662083 Probability Obs*R-squared 16.12795 Probability Note: *significant at 5% level of significance Source: Computation based on data gathered. 0.019872* 0.064257

The results only mean that the model has used the correct data and that it has no specification bias. This means that we have used the correct functional form, the variables we used are the correct ones and that there was no data transformation that was made.

CHAPTER 5
42

SUMMARY, CONCLUSION, AND RECOMMENDATION

This chapter presents the rundown of the findings and results which were made in the previous chapter and the suggestions that the researchers would like to have. 5.1. Summary This paper assessed the impact of FDI and DI (public and private) on the Philippines GDP per capita by using quantitative data that were available from the year 1974-2007. The results suggested that FDI has proven to be more productive than DI in its impact on GDP per capita by using the ordinary least square multiple regression analysis. This result contributed to the previous studies of Oneal and Soysa (1999) as well as Khawar (2005) by means of confirming the results from these studies indicating that the flow of capital, whether form domestic or foreign sources has beneficial effects on the economic growth of a country. Aside from this, when the two types of investment is compared on their effects on GDP, FDI tends to affect GDP per capita more. This means that although DI affects GDP, FDI has still a far greater importance in improving the countrys GDP per capita since as proven in the Granger-Causality Test, FDI affects GDP and GDP affects public DI. It is worth mentioning that aside from foreign direct investment, this paper also included the effects of domestic investment specifically public and private domestic investment on the GDP per capita in the Philippines. 43

5.2. Conclusion The application of the ordinary multiple regression result estimates revealed that indeed investment affects GDP. When it comes to the coefficients of the independent variables, it can be presented that FDI has a significant role and a greater impact on the GDP per capita of the country. Furthermore, there was also a high coefficient of determination between the variables. The results even show that by using granger causality test, FDI affects GDP and GDP affects public DI and not the other way around. The model also appears to be significant, which means that it can qualify for a meaningful econometric modeling and discussion. Aside from this, we conclude that even though DI is one of the major components of GDP, as what the equilibrium output of the goods market says, FDI has more impact to GDP since it has a higher coefficient values in the multiple regression analysis. FDI had proven that it has a greater significance in improving the Philippines GDP per capita as compared to DI. This is also supported by the result of the Granger-Causality test where FDI has been proven to granger cause GDP at 10% level of significance. This means that FDI could really help the country in innovating and improving its productive capabilities through better production facilities and more efficient manufacturing of products which could in turn bring greater output and more products for consumers. Aside from this, if the two types of domestic investment are to be compared, the results showed that private domestic investment is greater than that of the public domestic investment. This 44

means that private firms really contributes more also on the GDP per capita of the country.

5.3. Recommendations Based on the findings of the study, the following recommendations are now presented:

1.) FDI was proven to be more beneficial than that of DI; the government should be more open with the idea of FDI and the interaction among other countries since open economy such as Singapore and Hong Kong are more likely to encourage competitiveness and economic efficiency. Aside from this, the country could also find ways to know whether which other sectors could be helped by FDI inflows aside from the most common manufacturing sectors that we already know. The government must seek new capital ventures where other sectors aside from the industry must be included such as services or maybe perhaps agriculture.

2.) The government could also start to establish a big brother policy wherein a foreign investor is obliged to tap part of its resources and operations from local small businesses, and provide technical transfer to them, to affect DI specifically private domestic investments.

45

3.) Moreover, creating a stronger technical exchange and alliance with our ASEAN neighbours and China, recognizing Chinas emergence as a global powerhouse. The result is this shift of FDI towards Asia, which we can take advantage of and ride with our neighbours.

4.) Consolidating also all IPA operations under one roof/entity (e.g. PEZA and BOI have different incentives for investors and subsequently, have different reports and are actually independent of each other) though they are both under DTI, they operate independently.

5.) The government should continue having a joint venture in investments with our ASEAN counterparts (connected with previous statement) by making package investment deals to sweeten the pot for investors. For example, Ford makes the transmission parts here while it produces the brake assembly in Thailand.

6.) Increasing infrastructure for transport (ship ports, airports, roads) and communications (phone, internet, satellite link) and expand to places outside NCR, Region 3 and Region 4 (where most of the EPZs are located) to further boost development in the countryside.

46

7.) Promoting the 10 priority investment sectors the government has been pushing through for years and promoting EPZs.

8.) Promoting the country as a niche market in areas where we are strong and where we have a unique offering for the investor such as shipbuilding (Hanjin in Subic and Tsuneishi in Cebu)

9.) Since tax incentives such as tax holidays arent that effective on attracting foreign investors to the country, the government should provide new policies like creating promotional incentives for big-ticket investors who bring in other potential investors in the country. The present locators (those already with investments in the country) can invite their colleague-investors to invest in the country. If successful, these investors can have privileges such as free retirement packages for the head and his/her family). They can also avail of free convention package with PICC (Philippine International Convention Center), for example, to showcase their products and invite other clients and investors in the Philippines.

10.)

Furthermore, the researchers think that further studies on the impact of

FDI and DI (private and public) on the Philippines GDP per capita could be more interesting if they could add certain variables that also affects the level of FDI and DI (private and public) such as human capital investment, political

47

instability, tax rates and the geographical setting of the country since due to time and budget constraints especially on the collection of secondary data of foreign direct investment, the researchers didnt had the chance to include said variables. Lastly, it is also better to include other indirect investment such as so as to know if it has also a great effect on the impact of GDP per capita.

APPENDIX A. Data Summary

YEAR 1974 1975 FDI* 269.22 390.94 Exchange Rate***** 7.065 7.498 GDP** 430314 454260 POPULATION*** 37.67 39.98 Private DI**** 1902.03 9 2931.26 8 Public DI**** 266.1386 299.77

48

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

512.96 695.79 852.12 1051.41 1280.88 1587.69 1931.59 275.61 146.55 246.9 108.25 96.38 63.99 202.81 195.87 415.3 328.01 377.74 881.89 815 1281 1053.38 884.71 2106.73 1398.2 857.87 1431.42

7.428 7.37 7.375 7.415 7.6 8.2 9.171 14.002 19.76 19.032 20.53 20.8 21.335 22.44 28 26.65 25.096 27.699 24.418 26.214 26.288 39.975 39.059 40.313 50 51.4 51.609

494265 521954 548950 579909 609768 630642 653467 665717 616962 571883 591423 616923 658581 699448 720690 716522 718941 734156 766368 802224 849121 893151 888000 918160 972960 990042 1034094

42.29 44.6 45.8 47.04 48.32 49.3 50.6 51.8 53 54.24 55.52 53.83 58.17 59.54 60.94 62.36 63.82 65.32 66.84 68.41 70.01 71.65 75.16 76.78 76.79 78.59 80.16

3810.26 7 5127.97 2 6284.38 5 7796.20 5 9734.68 8 13019.0 6 17714.6 1 3859.09 1 2895.82 8 4699.00 1 2222.37 3 2004.70 4 1365.22 7 4551.05 6 5484.36 11067.7 5 8231.73 9 10463.0 2 21533.9 9 21364.4 1 33674.9 3 42108.8 7 34555.8 9 84928.6 1 69910 44094.5 2 73874.1

314.1301 328.702 337.775 348.8016 367.232 404.26 464.0526 725.3036 1047.28 1032.296 1139.826 1119.664 1241.057 1336.078 1706.32 1661.894 1601.627 1809.299 1632.099 1793.3 1840.423 2864.209 2935.674 3095.232 3839.5 4039.526 4136.977

49

2003 2004 2005 2006 2007 Source:

1488.18 680.27 552.135 986.387 949.515

54.203 55.939 55.0855 51.3143 46.1484

1085072 1154295 1211452 1276873 1368641

81.88 83.56 85.26 86.97 88.27

5 80663.8 2 38053.6 2 30414.6 3 50615.7 6 43818.6

4438.142 4674.263 4696.59 4462.805 4073.519

*Central Bank/ BSP Registered Equity Investments by country of Investor (in million US dollars) **Selected Philippine Economic Indicators Yearbook, 2003 (in million pesos at constant 1985 prices) ***Selected Philippine Economic Indicators Yearbook, 2007 (in million persons) ****Philippine Statistical Yearbook, 1978, 1996, 2007 (in million pesos at constant 1985 prices *****Selected Philippine Economic Indicators Yearbook

APPENDIX B. Sample Letter of Request for BSP 07 July 2008 Mr./Ms. F. Diangson BSP Library Head, Bangko Sentral ng Pilipinas A. Mabini St. cor. P. Ocampo St., Malate Manila, Philippines 1004 Dear Sir/Madam: This is to introduce the following Economics students of the College of Commerce of the University of Santo Tomas: Ms. Jennifer Letran Ms. Ana Katrina Quiambao Ms. Marigold Hao They are currently enrolled in Economics Research II where the main requirement or output is a thesis. At this time, they are in the process of gathering pertinent information or data or resources for their paper entitled:

50

The Impact of Foreign Direct Investment and Domestic Investment to the Economic Growth in the Philippines In line with this, may I request your office to extend your kind assistance to these students by way of providing them the necessary data relevant to their study. Thank you very much. Sincerely, Asst. Prof. Clarissa Ruth S. Racho Chairperson, Economics Department College of Commerce, UST

APPENDIX B. Sample Letter of Request for NEDA 30 September 2008 Jonathan L. Uy Public Investment Staff, Director IV National Economic and Development Authority (NEDA) 12 Saint Josemaria Escriva Drive, Ortigas Center, Pasig City 1605 PHILIPPINES

Dear Sir: This is to introduce the following Economics students of the College of Commerce of the University of Santo Tomas: Ms. Jennifer Letran Ms. Ana Katrina Quiambao Ms. Marigold Hao They are currently enrolled in Economics Research II where the main requirement or output is a thesis. At this time, they are in the process of gathering pertinent information or data or resources for their paper entitled:

51

The Impact of Foreign Direct Investment and Domestic Investment to the Economic Growth in the Philippines In line with this, may I request your office to extend your kind assistance to these students by way of providing them the necessary data relevant to their study. Thank you very much.

Sincerely, Asst. Prof. Clarissa Ruth S. Racho Chairperson, Economics Department College of Commerce, UST REFERENCES Asheghian, Parviz (2004). Determinants of Economic Growth in the United States: The Role of Foreign Direct Investment. The International Trade Journal, vol. XVIII, no.1, pp. 63-83. Austria, Myrna S. (1999). The Emerging Philippine Investment Environment. Journal of Philippine Development, Volume XXV, No.1. Berthelemy, Jean-Claude and Sylvie Demurger (2000). Foreign Direct Investment and Economic Growth: Theory and Application to China. Review of development Economics, 4(2), 140-155. Cai, Kevin G. (1999). Outward Foreign Direct Investment: A Novel Dimension of Chinas Integration into the Regional and Global Economy. The China Quarterly, Vol. 31, No. 3.

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