Citation
Almasaied, Suliman Warred
(2004)
Foreign Direct Investment, Domestic Investment and Economic Growth: Evidence from ASEAN-5.
PhD thesis, Universiti Putra Malaysia.
Abstract
This study is an empirical analysis of the impact of domestic investment and FDI on
the economic growth of ASEAN-5 namely Indonesia, Malaysia, the Philippines,
Thailand and Singapore during the last four decades. Also the study focuses on the FDI
inflow into ASEAN-5, and the domestic investment accumulation process in the
ASEAN-5.
This research was conducted following recent events such as the decline in the inflow
of foreign capital and growth rates of domestic investment and thereafter the economic
growth after the Asian financial crisis, and the search for new policy options that could
contribute to sustained economic growth.
The growth and FDI models for this study are derived from the endogenous growth
model, which can explain the behaviour of ASEAN-5 economies. The theoretical
models are based on the previous works of Romer (1991), and developed by Borensztein, e. al. (1998). The domestic investment equation is derived based on the
flexible accelerator model, which is an extension of a model established by Fry (1998)
and developed by Agrawal (2000a, 2000b).
This study utilized the autoregressive distributed lag approach to cointegration
(ARDL) developed by Pesaran et al. (1996, 2001). This technique has additional
advantages of yielding consistent estimates of the long-run coefficients. It is also free
of residual correlation, and can distinguish between dependent and explanatory
variables.
The major findings of this study can be summarized as follows: (i) domestic
investment, FDI, and financial intermediation significantly affect the economic growth
of ASEAN-5; (ii) FDI has positive and significant effect on domestic investment and
vice-versa. ; (iii) the improvement in the development level of financial intermediation
and human capital has a vital role on ASEAN-5’s economic growth through FDI and
domestic investment channels; (iv) the growth rate of GDP and domestic investment
significantly affect FDI inflows to ASEAN-5; (v) outward-looking together with stable
exchange rate policies contribute positively to both FDI and domestic investment and
thereafter economic growth; (vi) the results reveal that ASEAN-5 can rely on domestic
resources such as investment, saving, human capital, financial intermediation as
instruments of economic growth, and FDI alone may not be able to sustain economic
growth. Hence, economic growth based on domestic resources should be encouraged.
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