THE EFFECTS OF FOREIGN DIRECT INVESTMENT AND FOREIGN TRADE ON ECONOMIC GROWTH IN THE EURASIAN ECONOMIC UNION: PANEL DATA ANALYSIS
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Abstract
The relationship between foreign trade and economic growth is one of the oldest topics in the economic literature and is still being analyzed today. There are two different views on how foreign trade affects economic growth. These views are respectively, Imports-based growth hypothesis where imports indirectly effect economic growth positively and export-based hypothesis where country's production capacity grows parallel with economic growth. Due to the increasing need for input, more capital, and intermediate goods are exported, thereby increasing exports. In 1991, with the dissolution of the Soviet Union, the countries that gained independence had to adapt quickly to the liberal economy. These countries, whose economic structures are different, have tried to accelerate their economic growth by attracting foreign direct investment and increasing their exports. The foreign direct investment, export, and import variables were statistically significant on the gross domestic product in the model, which was established by the panel data analysis method of Belarus, Kazakhstan, Kyrgyzstan, Armenia, and Russia, which are members of the Eurasian Economic Union, between the years 1995-2018. Among these, the affects of import and export variables were estimated as positive, while foreign direct investment was estimated as negative. GDP leads to a change of 2.3810, 0.1114, and -1.3789 units in the face of an increase in exports, imports, and foreign direct investments, respectively.
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Abstract
Dış ticaret ve ekonomik büyüme arasındaki ilişki iktisat literatürünün en eski konularından biri konumundadır ve halen güncel olarak araştırılmaktadır. Dış ticaretin ekonomik büyümeyi nasıl etkilediği yönünde iki farklı görüş bulunmaktadır. Sırasıyla bu görüşler İthalata dayalı büyüme hipotezinde, ithalatın ekonomik büyümeyi dolaylı bir şekilde olumlu etkilediği, ihracata dayalı hipotezde ise, ekonomik büyümeye paralel olarak ülkenin üretim kapasitesinin artması ve girdi ihtiyacının artması nedeniyle daha fazla sermaye ve ara mal ihraç edilerek, böylece ihracat artmaktadır. 1991 yılında Sovyetler Birliğinin dağılmasıyla birlikte bağımsızlığa kavuşan ülkeler, hızlı bir şekilde liberal ekonomiye uyum sağlamak zorunda kalmışlardır. Ekonomik yapıları farklı olan bu ülkeler daha çok doğrudan yabancı yatırım çekerek ve ihracatlarını arttırarak ekonomik büyümelerini hızlandırmaya çalışmışlardır. Avrasya Ekonomik Birliğine üye olan Belarus, Kazakistan, Kırgızistan, Ermenistan ve Rusya ülkelerinin 1995-2018 yıllarına ait verileriyle panel veri analizi yöntemiyle kurulan modelde doğrudan yabancı yatırım, ihracat ve ithalat değişkenleri istatistiksel olarak gayrisafi yurtiçi hasılanın üzerinde anlamlı etkiye sahip olduğu görülmüştür. Bunlar arasında ithalat ve ihracat değişkenlerinin etkisi pozitif, doğrudan yabancı yatırım ise negatif etkili olarak tahmin edilmiştir. İhracat, ithalat ve doğrudan yabancı yatırımlardaki bir birimlik artış karşısında GSYİH sırasıyla 2.3810, 0.1114 ve -1.3789 birimlik değişikliğe neden olmaktadır.
Keywords
- There are two different hypotheses regarding the realization of economic growth with the help of foreign trade in the literature. The first is the export-based growth hypothesis, and the second is the growth hypothesis based on imports. According to the export-based growth hypothesis, export increases are the driving force of economic growth by causing more efficient distribution of resources, economies of scale, increasing productivity, providing capital accumulation and increasing employment (Küçükaksoy, 2015, s. 692). According to the importbased growth hypothesis, domestic companies will have to make better quality production by competing with foreign companies. This will increase innovation, causing improvements in total factor efficiency (Star and Barber, 2008, s.166).
- The relationship between foreign direct investments and economic growth can also be two-way. According to the growth hypothesis based on foreign direct investments, foreign direct investment inflows create new business opportunities by increasing capital stock. In general, studies show that foreign direct investments positively affect economic growth. However, sometimes foreign direct investments are advantageous to domestic investors as a result of the incentive decisions taken by governments, stifling domestic investments, and increasing the external deficit, negatively affecting economic growth (Aries and Saidmurodov, 2018, s.325).
- The impact of foreign trade and foreign direct investments on economic growth has been examined in many scientific studies with different econometric methods. In 2017, Sakyi and Egyir examined the impact of exports and foreign direct investments on economic growth in 45 African countries between 1990 and 2014. They analyzed the affects of exports, and foreign direct investments on economic growth, and they concluded that foreign direct investments and exports had both short and long term significant affects on economic growth. In his 2016 study, Zahonogo examined the relationship between commercial openness and economic growth in 42 sub-Saharan African countries between 1980 and 2012.It has found a statistically significant and positive relationship between commercial openness and economic growth. However, he noted that the effect decreased over time and took the opposite U shape. They found that Kılıç and Beser studied the relationship between foreign trade and economic growth in the Eurasian Economic Union countries for the period 1992-2015 in 2017, and found that there is a two-way causality from growth to exports and one-way causality from growth to imports. In the studies conducted by Hussain and Haque in the period of 1973-2014 in 2016, the effect of foreign direct investments and trade on economic growth was determined by the vector error correction model and found a long-term relationship between the variables. They concluded that trade and foreign direct investments significantly affect GDP per capita significantly and positively.
- In 2018, Zhao concluded that the growth of exports and imports on economic growth in the Chinese economy revealed that 1% increase in exports in the short term increased economic growth by 0.86% and 1% increase in imports by 0.88%. In the studies of Öztürk and Özel in 2018, when they examined the relationship between foreign trade and economic growth in E-7 countries for the period 1990-2016, OLS model in E-7 countries were more suited to the importbacked growth model. In his study, Keho examined the relationship between commercial openness and economy in the Ivory Coast for the period 1965-2015 in 2017, and concluded that commercial openness positively affects economic growth in the short and long term with the ARDL model In 2012, Gul and Kamaci examined developed and developing countries through panel data analysis method surged in 1980-2010, 1993-2010, and they were unable to find a causality towards imports and exports from growth to imports and exports in both developed and developing countries. However, they have identified causality from import and export to growth in both developed and developing countries. Suresh v.d. In their studies in the Indian economy in 2018, between 1993 and 2014, where they analyzed the effects of tourism and trade on economic growth, they found a two-way causal relationship between trade and tourism. They also found that there was causality towards economic growth from both variables.
- In their study published in 2017, Kalai and Zghidi identified a one-way long-term relationship from direct foreign investments to economic growth in the Middle East and North African countries between 1999 and 2012, with the ARDL and vector error correction model.
- İqbal et al. According to the results of the VAR model, they determined a long-term relationship between the factors in the study of the Pakistan economy in 2010, in which they examined the relationship between foreign direct investment, trade, and economic growth in the 1998-2009 period. In addition, according to the Vector error correction model, two-way causality was found between foreign direct investments, exports, and economic growth.
- Şerefli's study published in 2016, examined the period between the years of 1975-2014 in Turkey has been unable to determine the causal relationship between foreign trade and economic growth.
- In 2012, Sarısoy and Koç found in their studies in 40 underdeveloped and developing countries that the lowest income distribution group received the lowest share of foreign direct investments, while those in the highest income group received the largest share. Therefore, in case of inequality in income distribution in the country, it can be said that only certain segments of society benefit from foreign investments.
- In this study, the effect of foreign trade on economic growth was investigated for the Eurasian Economic Union countries. For this reason; Related to the period of 1995-2018,
- - Gross domestic product, billion dollars at 2010 fixed prices (GDP),
- - Exports, billion dollars at 2010 fixed prices (EXPORT),
- - Imports, billion dollars at 2010 fixed prices (IMPORT), variables were taken for the following countries.
- Whether fixed or random effect models are used in panel data analysis is an important problem. The model to be used depends on the relationship between individuals' effects and explanatory variables. Gujarati (2003) suggested that random effects model should be used in cases where there is no relationship between effects and explanatory variables, and fixed effects model should be used in cases where there is a relationship.
- GDP FDI EXPORT IMPORT Average 300.00 -0.73 92.57 64.27 Standart Deviation 534.74 5.99 152.07 106.31 Flatness 1.46 13.22 1.97 4.05 Skewness 1.75 2.22 1.83 2.26 Min 2.44 -19.12 0.64 1.76 Max 1722.19 35.05 564.35 440.32 According to the summary statistics given in Table 1, GDP variable was realized as an average of 300 billion dollars in the period. Considering all countries, this series reached the highest value of 1722.19 billion dollars for the Russian Federation in 2018, while the lowest was observed as $2.44 billion for Kyrgyzstan in 1995. When the panel structure of the series is ignored, it can be said that the series shows a pointed structure from the normal distribution with 1.46 kurtosis value, while the skewness coefficient is 1.75 due to the right skewed structure.
- The FDI variable was an average of -0.73 billion dollars in the period. Considering all countries, this reached the highest value of $ 35.05 billion dollars for the Russian Federation in 2014, while the lowest was observed as $ -19.12 billion for the Russian Federation in 2008. When the panel structure of the series is ignored, it can be said that the series shows a sharp structure from the normal distribution with 13.22 kurtosis value, while the skewness coefficient is 2.22 due to the right skewed structure.
- In the period under consideration, the EXPORT variable was 92.57 billion dollars. Considering all countries, it has reached 564.35 billion dollars for the Russian Federation in 2018, while the lowest was 0.64 billion dollars for Armenia in 1995. When the panel structure of the series is ignored, it can be said that the series shows a pointed structure from the normal distribution with the kurtosis value of 1.97, while the skewness coefficient is 1.83 due to the right skewed
- billion in Kyrgyzstan in 2001. When the panel structure of the series is ignored,
- 18.6700 0.0446 Pesaran 2004 Cross Sectional Dependency Test
- -0.9450 0.3449 Pesaran 2008 Cross Sectional Dependency
- 0, while the Pesaran 2004 test coefficient was calculated as -0.9450 and the p-
- value for this coefficient as 0.3449. Finally, Pesaran 2008 test coefficient was
- Pesaran 2007 panel unit root test, which is one of the second-generation tests that takes into account the horizontal Cross Sectional Dependency is applied to the dependent and independent variables in the model with fixed and fixedtrend models. The results are given in Table 3. Panel Unit Root Test Variable
- Breush Pagan 1980 sectional Section Dependency Test test statistic was calculated as 28.9300 with 0.0013 p-value. According to this, the hypothesis that there is no problem of sectional dependency in the model
- As a result, in this study, the effect of foreign trade on economic growth was investigated for the Eurasian Economic Union countries. For this purpose, panel data analysis was performed with the data of 1995-2018 for 5 countries and 4 variables. Before panel data analysis, the existence of sectional dependency was investigated and parallel to this, panel unit root test was applied. According to the panel unit root test results, since GDP and EXPORT variables have unit roots, the variables are stabilized by taking the first-row difference of these variables.
- In this study, Russia, Belarus, Kazakhstan, Kyrgyzstan and Armenia, which are the members of the Eurasian Economic Union, were analyzed with the help of panel data analysis model using the foreign direct investment, export, import and GDP data of 1995-2018. In the model established, foreign direct investment, export and import variables have statistically significant effects on gross domestic product. Among these, the impact of import and export variables is positive, while foreign direct investment is estimated to be negative. One-unit increase in exports increases GDP by 2.3810 units. One-unit increase in imports increases GDP by 0.1114 units. One-unit increase in foreign direct investments decreases GDP by 1.3789 units.
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