Abstract
In this paper the author tests for the short-run dynamics and long-run cointegration relationship between foreign direct investment (FDI) inflows and economic growth for the BRICS (Brazil, Russia, India, China, and South Africa) standalone economies controlling for real exchange rate, trade openness, and domestic investment. The autoregressive distributed lag (ARDL) bounds testing method of cointegration is used to test for the long-run relationship of our FDI time series model by investigating annual macroeconomic datasets for the years 1981 to 2018 (inclusive). Coupled with the ARDL, the error correction model is applied to test for the short-run dynamics, while the Toda Yamamoto test is used to examine the causality direction between the constructs of interest. The Breusch-Godfrey and Ljung-Box are used as diagnostic tests for the ARDL assumptions of normality, independency, and autocorrelation in residuals, while the Breusch-Pagan-Godfrey test is used to test for heteroscedasticity. According to the short-run estimates, all variables have a significant lagged impact on FDI inflows with slight differences among countries. As for the long run, estimates reveal a positive and significant impact of GDP on FDI inflows for Russia, India, China, and South Africa but a positive and insignificant relationship for Brazil. The long-run estimates for the controlling variables evidence varied results among the BRICS countries. In contrast to Brazil and Russia, the Toda Yamamoto causality test discloses a significant and unidirectional flow between the GDP growth and FDI inflows for India, China, and South Africa. The results have meaningful implications for policy reform structures, economic integration among economies, multinational firms, and portfolio managers.
Highlights
The intrarelationship between foreign direct investment (FDI) and economic growth has been extensively deliberated by academics, professionals, and government policy makers as FDI inflows have become a crucial input for economic development
The autoregressive distributed lag (ARDL) bound cointegration test concluded that FDI inflow variable (FDIF) is cointegrated with selected variables, indicating that all countries are significant at 1% level of significance, except Brazil, which is still significant but at 5% level
For the BRICS economies, in this paper we tested for the short-run dynamics and the long-run cointegrating relationship between FDI inflow and economic growth over the period 1981–2018, while controlling for real exchange rate, trade openness, and domestic investment as proposed influential variables
Summary
The intrarelationship between foreign direct investment (FDI) and economic growth has been extensively deliberated by academics, professionals, and government policy makers as FDI inflows have become a crucial input for economic development. Most host economies have responded to the proposition that investment capacity in the host country is totally imperfect unless it is appended by FDI inflow; they undergo extensive market-oriented reforms and structural macroeconomic alterations to overcome distortions in their economies (Dinh et al, 2019; Kathuria, 2019). Such transformation reforms and similar measures have started by easing home currency exchange rate controls and allowing the market conditions to control for the exchange rate of the currency and its volatility. Trade openness has become prevalent over the past three decades as a mas.ccsenet.org
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