SANTO TOMAS UNIVERSITY

INTERNATIONAL BUSINESS
FOREIGN DIRECT INVESTMENT
GROUP A

Students:
Mireya Marcela Mora Muoz
Leda Mindiola Gmez
Lizeth Paola Pineda Nio
Laura Carolina Rodrguez


RESEARCH ACTIVITY


1. CHANGING DYNAMICS OF FOREING DIRECT INVESTMENT IN CHINAS
AUTOMOTIVE INDUSTRY
Lingling, W., Bo, F., Aybar, C., & Ficici, A. (2013)
EMAJ

PURPOSE
According to the article the purpose is to estimate the effects
of FDI on the productivity of the Chinese automotive industry
during the period of 19992008, and examine the channels
through which FDI may affect the productivity of the auto
industry and whether the interaction between FDI and human
capital can influence the FDIproductivity link.

OBJECTIVE
Explore the direct effect of FDI in the development of Chinas
automotive industry, based on the development of new
products and processes, the demonstration and imitation
effects, the linkages effect and the worker training effect.

QUESTIONING
How FDI influences the productivity of Chinese automotive
industry?
How FDI and human capital can influence the FDI
productivity link?
Why the productivity of the automotive industry is considered
important in the development of a country?
What are the direct and indirect effects of FDI?

METHODOLOGY Methodology
The paper is organized as follows: in Section
II, a literature review is presented. In Section
III, the model, data and methodology are
described. In Section IV, the results are
discussed and in in Section V, the conclusion,
The limitations of the research as well as
recommendations for further research are
presented.

Theories
Internalization Theory/ MNE Theory of
Buckley and Casson (1976): MNEs
are engaged in a bundle and complex
activities through a system of
networks.
Multinational Enterprises and
Economic Analysis: Caves, 1996;
Markusen and Venables, 1999: There
are five interrelated modes through
which FDI may impact a host countrys
productivity directly and indirectly.

Concepts
R&D Centers: The capacity of
generating knowledge in the host
country is improved by participating in
the R&D activities of MNCs.
Backward linkage: is the linkage
between MNCs and suppliers.
Forward linkage: occurs between the
MNCs and their customers and the
companies that buy their products.
Demonstration-imitation: Local
companies improve their productivity
by watching and imitating the way
foreign companies operate.
Training effect: Employees who are
employed by foreign companies may
diffuse knowledge, skills, and
management practices learned to local
companies through labor turnover or if
they run their own businesses.
Methods
1) They employed the widely adopted
Cobb-Douglas production function
model to test the relationship and the
link between productivity and FDI.
They incorporated the following form of
the equation:
Y = f (L, K, H, R, F, S, G, E)
Where: Y (productivity), L (input of labor), K
(Domestic capital stock), H (Human capital),
R (Domestic technological efforts), F (Direct
effects from FDI), S (Spillovers of FDI), G
(Absorptive Capacity), E (Firm Size).
2) Also a logarithmic model is employed to
measure the elasticity of the impact of the
independent variables on the dependent
variable as described by the equation below:
Ln(Y
it
) =
i
+
1
Ln(L
it
) +
2
Ln(K
it
) +
3
Ln(H
it
)
+
4
Ln(R
it
) +
5
Ln(F
it
) +
6
Ln(S
it
) +

7
Ln(G
it
) +
8
Ln(E
it
) +
it

Where i and t denote the sub-sectors of the
industry and time; is the intercept and is
the stochastic error term. The coefficients
1,

2,

3,

4,

5,

6,

7
and
8
show the
percent change in Ln(Y) related with percent
change in variables L, K, H, R, F, S, G and E
respectively.
3) Also they employed the statistical models
POLS (pooled ordinary least squares model)
and FES (Fixed effects model) in order to
estimate equation.
Findings The results indicate an important finding and suggest that
inward FDI plays a negative role in raising productivity in the
automotive industry, which is one of the most crucial key
sectors in Chinese economy.
The results contradict the theory of FDI that MNCs play an
important role to improve the host countrys economy through
introducing and transferring capital, advanced technologies
and managerial skills.
The results may also denote that governmental policies
introduced to attract FDI are not effective enough to promote
productivity.
Conclusion Although in this study, it is shown that FDI has a negative
impact on the productivity of the automotive industry, as a
whole, it is likely that some sub-sectors benefit from FDI and
others do not. The development of the Chinese automotive
industry could have not been achieved without the
participation of MNCs, especially in the early stages.
It may not sensible for the Chinese government to keep
imposing ownership limits on the inflow of FDI in the
automotive industry as this practice decreases the productivity
and does not allow the industry to benefit from direct effects of
FDI.
What do we
learn from the
article
The influence of FDI in the productivity of a dominant
sector of a country, showing that it can create positive
or negative effects.
The influence of the government policies is important in
the development of the industries in a country, as
creating policies that incentive the FDI in a country
through real benefits for the investors.
To increase productivity of a sector, its necessary to
create R&D centers on order to generate knowledge for
the host country, also reflected by the technology
diffusion and the maintenance of competitive
advantage.
As a personal development, the activity offered us a
new way to understand these types of articles through a
dynamic chart that summarized it.


























2. CAUSAL RELATIONSHIP BETWEEN INTERNATIONAL INVESTMENT AND
ECONOMIC GROWTH IN INDIA DURING 1991 TO 2012: A CASE OF FOREIGN
DIRECT INVESTMENT
Rajni Pathania
Research Scholar, Department of Business Economics, Faculty of Commerce
The M.S. University of Baroda,Vadodara Gujarat India (April, 2013)
PURPOSE
According to the article the purpose is to investigate the causal
relationship between Foreign Direct Investment and Economic
Growth in Indian Economy and whether there is uni-directional
or bidirectional causality.
OBJECTIVE
To empirically analyze the causal relationship between
Foreign Direct Investment and Economic Growth in India.
QUESTIONING
What is the causal relationship between Economic growth
and Foreign Direct Investment in India?
Why FDI is considered important in the economic growth of
India?
What are the two types of FDI in India?
What are the industries that receive FDI inflows?

METHODOLOGY
Methodology
The paper is organized as follows:
1. Examine whether a time series data have a
unit root, this paper have used Augmented
Dickey Fuller test (ADF) unit root test.
2. Find the long run relationship between two
variables; this study has applied the
Johansens Cointegration test.
3.Examine causality between FDI and
Economic Growth, this study have used
Granger Causality test.
Theories
Bengoa and Sanchez (2002) in their
study exploring empirically the
interplay between Economic Freedom,
growth and FDI, using panel data
analysis on a sample of 18 Latin
America countries over the period
1970- 1999 found a positive effect of
FDI on their growth.
Cambos and Kinoshita (2002) in a
study of the impact of FDI on economic
growth in 25 Central and Eastern
European and former Soviet Union
transition economies between 1990-
1998 found that FDI has a positive
effect on economic growth.
Moudatsou (2003) examined the
growth effects of foreign direct
investment in European Union
countries, when controlling for other
growth determinants.
Khawar (2005) using the method of
ordinary least squares (OLS) the
foreign direct investment is significant
and positively correlated with growth
as well as domestic investment.
Damooei and Tavakoli (2006)
examined the output elasticity of
foreign direct investment (FDI) and
imports in Thailand and in the
Philippines during the period 1970-
1998. The estimated output elastic ties
showed that the Philippine economy is
both labor and domestic-capital
intensive compared to the Thai
economy.
Concepts
GDP: is the market value of all officially
recognized final goods and services
produced within a country in a given
period of time.
FDI: is a direct investment into
production or business in a country by
an individual or company in another
country, either by buying a company in
the target country or by expanding
operations of an existing business in
that country.
ECONOMIC GROWTH: is the increase
in the market value of the goods and
services produced by an economy over
time. It is conventionally measured as
the percent rate of increase in real
gross domestic product, or real GDP.
Methods 1) Standard Granger-causality test: to
examine causality between Foreign Direct
Investment and Economic Growth
Equation:

2) Unit root test: is a pre-requisite of testing
long run relationship between two or more
time series data.
Findings The Johnson cointegration test shows that the
economic growth and foreign direct investment are
cointegrated also indicated an existence of long run
equilibrium relationship between these two variables.
In global economy today, FDI is becoming more
important than trade as a mode of international
economic transactions. FDI has played an important
role in the process of globalization during the past two
decades in India.
There are two categories of investment: Direct
Investment and Portfolio investment.
Although services sector remain the sector attracting
the highest FDI inflows, the foreign investors are
interested in mainly financial services due its profit
generating advantage.
Conclusion Economic Growth is significantly influencing the Foreign Direct
Investment. There is only one way or unidirectional causal
relationship between Economic Growth and Foreign Direct
Investment in India; causality runs from Economic Growth to
Foreign Direct Investment. In India, there is a long-run
equilibrium relationship between Economic growth and FDI,
and economic growth Granger-causes Foreign Direct
Investment. The government of India must formulate a policy
for attracting FDI in such a way that it should be more growth
enhancing than growth retarding.
What do we
learn from the
article
As a personal development, the activity offered us a
new way to understand these types of articles through a
dynamic chart that summarized it.
The influence that the FDI does in the economic growth
of a country.
The influence of FDI in the dynamic process of
globalization.
The effects of FDI vary according to the economy and
its development and political conditions.
The economic growth and foreign direct investment are
co-integrated.
The governments must formulate a policy for attracting
FDI but in a way that do not generate negative effects
for the country.