The Nexus between Savings Gap, Foreign Exchange Gap, and Foreign Direct Investment Inflows into Asia: Two Gap Model Analysis with Panel Data Approach

Abstract

The study analyses the nexus between Savings (Savings- Investment), Foreign Exchange (Import- Export) Gap and net Foreign Direct Investment (FDI) inflow into Asian Countries. Economies for this analysis are taken from Newly Industrialised Countries (NICs) based on the valuation of GDP of the respective countries. Six countries, such as, China, India, Indonesia, Thailand, Malaysia and Philippines are considered for this study over a period 1982-2016. Using Panel Data Approach, the analysis has been able to find out a long run cointegration between Savings Gap and FDI as well as Foreign Exchange Gap and FDI. As proposed by Two Gap Model, the influence of FDI has been found on both the variables. Whereas the effect of savings gap on net FDI inflow is positive and significant for the said period with a negative Error Correction Term which proves the movement from short run disequilibrium to long run stable equilibrium. After proving the direction of causality, the short run joint influence of savings gap with its lagged values has been checked. Through Wald Test, the result is proved to be significant. On the other hand, the effect of Foreign Exchange Gap on FDI is not significant in nature. Finally, from the study, it is suggested that if domestic savings for all the six countries together are given importance from the level of respective Governments, the Savings Gap may be reduced which will indicate less dependence on foreign investments into these countries. Being NICs, self-funding of future investments is always preferred which is only possible if countries are contended with adequate capital accumulation on their own in previous periods.