Foreign Direct Investment, Financial Development and Economic Growth

1. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Foreign Direct Investment, Financial Development and Growth: The case of Ecuador Mario Alvaracn Paula School of Graduate Studies Universidad Carlos Tercero de Madrid September, 2014 Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

2. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Outline 1 Introduction The causal relationship between Financial Development and Economic Growth Why is this study important? 2 Literature Review Financial Development and Growth FDI, Financial Development and Growth 3 Theoretical Framework: (Hermes Lensink, 2003 Growth Model with Technological Change 4 Data and Context Selection of Variables and De

3. nition Putting in Context 5 Methodology Bound Test Approach Estimated Model 6 Results Stationarity Test Estimation Output 7 Conclusions Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

4. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions The causal relationship between Financial Development and Economic Why is this study important? The causal relationship between Financial Development and Economic Growth Schumpeter (1911): Well-functioning Banks are able to identify entrepreneurs that allow funds to be channeled to the most promising investment projects. Eciency Robinson (1952): Economic Growth creates demand for

5. nancial services, thereby existence of

6. nancial development. Levine et al. (2000): Exogenous components of

7. nancial intermediary development are positively associated with Economic Growth. FinancialDevelopment = EconomicGrowth. Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

8. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions The causal relationship between Financial Development and Economic Why is this study important? Why is this study important? Neoclasical growth model states that developing countries will experience rapid convergence with developed countries, once they have access to state of the art technologies. But, developing countries cant assume the cost, so FDI is important. Explore the long run relationship between FDI and economic growth, watching if the development of

9. nancial sector helps to capture the absorptive capacity to FDI in ows toward real output expansions. This study aims to observe if

10. nancial sector development act as an ecient mechanism when transferring the bene

11. ts embroiled in FDI in ows to enhance economic growth. Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

12. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Financial Development and Growth FDI, Financial Development and Growth Financial Development and Growth Nexus established in Levine (1997), role of

13. nancial system Acemoglu and Zilibotti (1997): Financial development pretends to make markets become less incomplete; capital accumulation is associated with an increase in the volume of

14. nancial intermediation and services Rioja and Valev (2003): Relationship may vary according to the level of

15. nancial development. Russeau and Wachtel (2011): Countries that has experienced

16. nancial crisis episodes may not have a clear

17. nance-growth relationship. Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

18. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Financial Development and Growth FDI, Financial Development and Growth FDI, Financial Development and Growth Hermes and Lensink (2003): The development of the

19. nancial system of the recipient country is an important precondition for FDI to have a positive impact on economic growth. Ecient allocation of resources. Alfaro et al. (2004): The level of development of local

20. nancial markets is crucial to canalize the positive eects of FDI. The link between FDI and growth is causal, where FDI promotes growth through

21. nancial markets. Many authors conclude that well developed

22. nancial markets promote higher economic growth by absorbing the bene

23. ts embodied in the foreign capital ows, especially FDI Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

24. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Growth Model with Technological Change The Model Constant rate of return Where represents the cost in research and development, L is the labor supply, A indicates the level of technology, measures capitals share of income or the proportion of capital income. Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

25. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Growth Model with Technological Change The Model FDI is introduced in the model by assuming that there are

26. xed maintenance costs, equal to 1, and

27. xed set up costs in . The cost of (research and development) depends on FDI, explicitly the higher FDI in ow leads to a decline in the innovation costs. Innovation cost function = f (F) Where F = FDI , and /F 0 Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

28. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Growth Model with Technological Change The Model The level of technology (A) is a function of the development of the

29. nancial sector (H), A = h(H), where A=H 0. Constant rate of return Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

30. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Growth Model with Technological Change The Model Households maximize a standard inter-temporal utility function, subject to the budget constraint. This gives the well-known Euler condition for the consumption growth rate gC = (1=)(r ), where is the elasticity of marginal utility and is the discount rate. Outputs growth rate Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

31. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Selection of Variables and De

32. nition Putting in Context Variables Dependent Variable Real GDP growth rate per capita Independent Variable Labor force (LF) Capital stock (CAP) Foreign direct investment to GDP ratio (net out ows of investment from the reporting economy to the rest of the world and is divided by GDP, FDI) Domestic gross investment to GDP ratio (gross

33. xed capital formation to real GDP, INV) Interaction term between the Foreign Direct Investment and

34. nancial development indicators listed below. Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

36. nition Putting in Context Variables Financial Development Indicators DEPHT: liquid liabilities of the

37. nancial system, known as M2 divided by GDP BANK: commercial and central bank assets (assets of deposit money banks divided by assets of deposit money banks plus central bank assets) PRIVATE: private credit (credit by deposit money banks and other

38. nancial institutions to the private sector divided by GDP) Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

40. nition Putting in Context Financial Development and FDI evolution Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

42. nition Putting in Context GDPpc annual growth rate Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

43. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Bound Test Approach Estimated Model Bound Test Approach Works on a limited simple size Use ARDL model for the estimation of long-run relationship Robust asymptotic on short and long-run parameters can be made under least squares estimates of an ARDL model The asymptotic distribution of the F-statistc is non-standard under the null hypothesis of no cointegration relationship between the examined variables ARDL model has the advantage of not requiring a precise identi

44. cation of the order of the underlying data Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

45. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Bound Test Approach Estimated Model Relationship between economic growth and its determinants without investment variable (INV) Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

46. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Bound Test Approach Estimated Model Relationship between economic growth and its determinants including investment variable (INV) Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

47. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Bound Test Approach Estimated Model Long-run relationship test Without INV H0 :

48. 1 =

49. 1 = ::: =

50. 6 = 0 With INV H0 :

51. 1 =

52. 1 = ::: =

53. 7 = 0 Fupper bound value; the null hypothesis of no long run relationship is rejected and concludes that there exists steady-state equilibrium between these variables Flower bound value; the null hypothesis is not rejected lower bound value F upper bound value; the result is inconclusive Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

54. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Stationarity Test Estimation Output Results of the Unit Root Test Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

55. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Stationarity Test Estimation Output Estimated model using BANK as

56. nancial development indicator Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

57. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Stationarity Test Estimation Output Cointegration Analysis Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

58. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Stationarity Test Estimation Output Estimated model using BANK and incliding INV Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

59. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Stationarity Test Estimation Output Cointegration Analysis including INV Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

60. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Main Conclusions It has been determined the existence of long-run levels relationship between economic growth and its determinants The best variable or the completest one is BANK to re ect the development of the

61. nancial system Including the variable INV changes substantially the eects, principally of FDI on economic growth, as the inclusion of INV represents a situation in which a variable aects growth via an eciency channel Financial crisis could aect the relationship between FDI, Financial Development and Growth Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

Foreign Direct Investment, Financial Development and Economic Growth

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