Do Long-run Relationships Exist Between Net Foreign Direct Investments and Real Output In Philippine Industries?

Abstract

This paper examined whether there were long-run relationships between net foreign direct investments (NETFDIs) and real output in the aggregate and across major industry sectors (agriculture, industry and services) in the Philippine economy. The general concern was to find out the causality or the leader-follower relationships that exist. In view of this, the correlogram and Dickey-Fuller tests were performed to determine the stationarity of the variables which were a pre-requisite to further tests that establish the long-run connection. Results of the correlogram and Dickey-Fuller tests showed that real output for the whole economy (Gross Domestic Product or henceforth, GDP) and, except for agriculture, real GDP across major industry sectors are non-stationary at level form, but became stationary after their first differences. On the other hand, the NETFDIs variables were all stationary at level form, which implies the absence of trends of NETFDIs in the country. Since FDIs were already stationary at level form, further tests to determine the long-run relationships could no longer be established. This indicates that only short-run relationships exist between real output and NETFDIs in the Philippines. Results of the regression analysis showed that NETFDI has no effect on real GDP, which may be due to the “crowding-out” of investments inherent in the Philippine economy