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IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Foreign Direct Investment, Financial Developmentand Growth: The case of Ecuador
Mario Alvaracın Paula
School of Graduate StudiesUniversidad Carlos Tercero de Madrid
September, 2014
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Outline
1 IntroductionThe causal relationship between Financial Development and Economic GrowthWhy is this study important?
2 Literature ReviewFinancial Development and GrowthFDI, Financial Development and Growth
3 Theoretical Framework: (Hermes Lensink, 2003Growth Model with Technological Change
4 Data and ContextSelection of Variables and DefinitionPutting in Context
5 MethodologyBound Test ApproachEstimated Model
6 ResultsStationarity TestEstimation Output
7 Conclusions
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
The causal relationship between Financial Development and Economic GrowthWhy is this study important?
The causal relationship between Financial Developmentand Economic Growth
Schumpeter (1911): Well-functioning Banks are able toidentify entrepreneurs that allow funds to be channeled to themost promising investment projects. Efficiency
Robinson (1952): Economic Growth creates demand forfinancial services, thereby existence of financial development.
Levine et al. (2000): Exogenous components of financialintermediary development are positively associated withEconomic Growth.
FinancialDevelopment => EconomicGrowth.
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
The causal relationship between Financial Development and Economic GrowthWhy is this study important?
Why is this study important?
Neoclasical growth model states that developing countries willexperience rapid convergence with developed countries, oncethey have access to state of the art technologies. But,developing countries can´t assume the cost, so FDI isimportant.
Explore the long run relationship between FDI and economicgrowth, watching if the development of financial sector helpsto capture the absorptive capacity to FDI inflows toward realoutput expansions.
This study aims to observe if financial sector development actas an efficient mechanism when transferring the benefitsembroiled in FDI inflows to enhance economic growth.
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Financial Development and GrowthFDI, Financial Development and Growth
Financial Development and Growth
Nexus established in Levine (1997), role of financial system
Acemoglu and Zilibotti (1997): Financial developmentpretends to make markets become less incomplete; capitalaccumulation is associated with an increase in the volume offinancial intermediation and services
Rioja and Valev (2003): Relationship may vary according tothe level of financial development.
Russeau and Wachtel (2011): Countries that has experiencedfinancial crisis episodes may not have a clear finance-growthrelationship.
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Financial Development and GrowthFDI, Financial Development and Growth
FDI, Financial Development and Growth
Hermes and Lensink (2003): The development of the financialsystem of the recipient country is an important preconditionfor FDI to have a positive impact on economic growth.Efficient allocation of resources.
Alfaro et al. (2004): The level of development of localfinancial markets is crucial to canalize the positive effects ofFDI. The link between FDI and growth is causal, where FDIpromotes growth through financial markets.
Many authors conclude that well developed financial marketspromote higher economic growth by absorbing the benefitsembodied in the foreign capital flows, especially FDI
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Growth Model with Technological Change
The Model
Constant rate of return
Where η represents the cost in research and development, L isthe labor supply, A indicates the level of technology, αmeasures capital´s share of income or the proportion ofcapital income.
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Growth Model with Technological Change
The Model
FDI is introduced in the model by assuming that there arefixed maintenance costs, equal to 1, and fixed set up costs inη.
The cost of η (research and development) depends on FDI,explicitly the higher FDI inflow leads to a decline in theinnovation costs.
Innovation cost function
η = f (F )
Where F = FDI , and δη/δF < 0
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Growth Model with Technological Change
The Model
The level of technology (A) is a function of the developmentof the financial sector
(H), A = h(H), where δA/δH > 0.
Constant rate of return
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Growth Model with Technological Change
The Model
Households maximize a standard inter-temporal utilityfunction, subject to the budget constraint. This gives thewell-known Euler condition for the consumption growth rate
gC = (1/θ)(r − ρ),where θ is the elasticity of marginal utility and ρ is the
discount rate.
Outputs growth rate
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Selection of Variables and DefinitionPutting 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 outflows ofinvestment from the reporting economy to the rest of theworld and is divided by GDP, FDI)
Domestic gross investment to GDP ratio (gross fixed capitalformation to real GDP, INV)
Interaction term between the Foreign Direct Investment andfinancial development indicators listed below.
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Selection of Variables and DefinitionPutting in Context
Variables
Financial Development Indicators
DEPHT: liquid liabilities of the financial system, known as M2divided by GDP
BANK: commercial and central bank assets (assets of depositmoney banks divided by assets of deposit money banks pluscentral bank assets)
PRIVATE: private credit (credit by deposit money banks andother financial institutions to the private sector divided byGDP)
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Selection of Variables and DefinitionPutting in Context
Financial Development and FDI evolution
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Selection of Variables and DefinitionPutting in Context
GDPpc annual growth rate
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Bound Test ApproachEstimated 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 bemade under least squares estimates of an ARDL model
The asymptotic distribution of the F-statistc is non-standardunder the null hypothesis of no cointegration relationshipbetween the examined variables
ARDL model has the advantage of not requiring a preciseidentification of the order of the underlying data
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Bound Test ApproachEstimated Model
Relationship between economic growth and itsdeterminants without investment variable (INV)
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Bound Test ApproachEstimated Model
Relationship between economic growth and itsdeterminants including investment variable (INV)
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Bound Test ApproachEstimated Model
Long-run relationship test
Without INV
H0 : β1 = β1 = ... = β6 = 0
With INV
H0 : β1 = β1 = ... = β7 = 0
F>upper bound value; the null hypothesis of no long runrelationship is rejected and concludes that there existssteady-state equilibrium between these variables
F<lower bound value; the null hypothesis is not rejected
lower bound value< F >upper bound value; the result isinconclusive Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Stationarity TestEstimation Output
Results of the Unit Root Test
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Stationarity TestEstimation Output
Estimated model using BANK as financial developmentindicator
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Stationarity TestEstimation Output
Cointegration Analysis
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Stationarity TestEstimation Output
Estimated model using BANK and incliding INV
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Stationarity TestEstimation Output
Cointegration Analysis including INV
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador
IntroductionLiterature Review
Theoretical Framework: (Hermes Lensink, 2003Data and Context
MethodologyResults
Conclusions
Main Conclusions
It has been determined the existence of long-run levelsrelationship between economic growth and its determinants
The best variable or the completest one is BANK to reflectthe development of the financial system
Including the variable INV changes substantially the effects,principally of FDI on economic growth, as the inclusion of INVrepresents a situation in which a variable affects growth via anefficiency channel
Financial crisis could affect the relationship between FDI,Financial Development and Growth
Mario Alvaracın Paula FDI, Financial Development and Growth in Ecuador