tiểu luận kinh tế lượng ANALYSIS OF FACTORS AFFECTING FOREIGN DIRECT INVESTMENT (FDI) IN THE WORLD

FOREIGN TRADE UNIVERSITY FACULTY OF BUSINESS ADMINISTRATION - - REPORT OF ECONOMETRICS ANALYSIS OF FACTORS AFFECTING FOREIGN DIRECT INVESTMENT (FDI) IN THE WORLD Class ID: KTEE309(1-1920).2_LT Student’s name Student ID Nguyễn Thị Vân 1812250041 Hoàng Phương Linh 1817250021 Nguyễn Thị Như Quỳnh 1816250033 Lê Ngọc Khánh Huyền 1812250019 Nguyễn Quỳnh Giang 1812250015 Lecturer: PhD Dinh Thi Thanh Binh Hanoi, 2019 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENTS INTRODUCTION CONTENT I Literature Review and Statistic Description Literature Review Main content II Statistic Description VARIABLE DESCRIPTION a Running DES function b Running SUM function c Running TAB1 function REGRESSION AND CORRELATION a Set up model b Analysing the correlation between independent variables .9 c Correlation relationship between variables d Running function 10 TESTING MODEL .11 a Multicollinearity 11 b Heteroskedasticity 13 c Testing Multiple Linear Regressions: F Test 14 d Testing hypothesis in statistic .15 IMPLICATION AND CONCLUSION 16 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com INTRODUCTION In a growing society, econometrics has been a science with many practical applications, especially issues related to human social life Econometrics provides powerful tools that enables economists to analyze the collected statistics and make predictions about social phenomena As students in the economic sector, we are well aware of the need to study and research econometrics Foreign direct investment (FDI) is recognized as a powerful engine for economic growth It enables capital-poor countries to build up physical capital, create employment opportunities, develop productive capacity, enhance skills of local labor through transfer of technology and managerial know-how, and help integrate the domestic economy with the global economy.  Therefore, the identification of factors affecting the attraction of foreign investment and an analysis of the impact of each factor to attract foreign investment is essential for the government in offering policies to attract investment capital And this aspect has inspired our group to illustrate it detailedly with this report “Analysis of Factors Affects FDI in the world” In “Analysis of Factors Affecting FDI in the world”, factors will be given in details and collected data of following factors will be operated, calculated and explained Further description will be continuously attached to each section for further understandings By the end of this report is followed by a reasonable conclusion section to summarize our result as a whole.  We would like to thank our instructor - PhD Dinh Thi Thanh Binh for helping us with this paper In the process of making the report, although we have tried hard, but surely could not avoid the errors, we hope that you will contribute to the completion of our report! LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CONTENT I Literature Review and Statistic Description - Literature Review Foreign direct investment (FDI):  An investment made by a firm or individual in one country into business interests located in another country in a year - Population growth (pog): The rate of the increase in the number of individuals in a population Large populations provide a large market for products and services, have a large labor force and a vast skill base Considering the advantages of a large population, it was hypothesized that investors would make larger investments in countries with larger populations.  - Inflation rate (ir) :Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time Rate of inflation is a crucial factor in influencing the inflow of foreign investment A high rate of inflation signifies economic instability associated with inappropriate government policies - Labor costs (lac) : The cost of labor is the sum of all wages paid to employees, as well as the cost of employee benefits and payroll taxes paid by an employer Wage as an indicator of labour cost has been the most contentious of all the potential determinants of FDI - Public debt (pud)  : The public debt is how much a country owes to lenders outside of itself These can include individuals, businesses, and even other governments The study employs a Vector Error Correction Model, which provides both the long run and short run relationships among the variables The long run results indicate that the relationship between public debt and foreign direct investment, as well as interest rate and FDI, is positive and statistically significant: the level of public debt should increase so that the level of foreign direct investment can increase in the country LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Main content a) Variables: There are chosen variables:  Fdi: Dependent variable  Pog: Independent variable  Ir: Independent variable  Lac: Independent variable  Pud: Independent variable b)    Outline: The report includes main parts : II  Part : Variables description using functions DES, TAB, SUM  Part : Analyze regression model and correlation  Part : Testing model  Part : Conclusion Statistic Description VARIABLE DESCRIPTION a Running DES function The most important information after using DES function is the variables label des fdi pog ir lac pud Table Result from running DES function By using des, we know clearly about the variables According to the results, we know:  fdi: Foreign direct investment in a year (unit: USD)  pog: Population growth in a year (unit: percentage)  ir: Inflation rate in a year (unit: percentage) LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com  lac: Labor costs in a year (unit: USD)  pud: Public debt in a year (unit: USD) b Running SUM function SUM function lets us know about observations, mean, standard deviation, max and value of the variables sum fdi pog ir lac pud Table Result from using SUM function By using SUM function, we have:  fdi: With 180 observations, the mean FDI per year is -1.84e+09, Std Dev is 2.59e+10 The minimum average FDI is -2.02e+11, the maximum average FDI is 1.332+11  pog: With 216 observations, the mean population growth per year is 1.303029, Std Dev is 1.307686 The minimum population growth is -3.91335, the maximum population growth is 5.790631  ir: With 203 observations, the mean inflation rate per year is 1.70359, Std Dev is 8.514521 The minimum inflation rate is -36.56478, the maximum inflation rate is 38.88166.   lac: With 192 observations, the mean Labor costs per year is 19352.66, Std Dev is 20301.35 The minimum Labor costs is 750, the maximum Labor costs is 121090  pud: With 122 observations, the mean Public debt per year is 5.29e+10, Std Dev is 1.52e+11 The minimum Public debt is 1.17e+08, the maximum Public debt is 1.33e+12 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com c Running TAB1 function Using TAB1 function allows to describe more than variables coincidently with frequency and percent of the variables tab1 fdi pog ir lac pud LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Table Result from running TAB1 with FDI in a year Example for analyzing information from the table: FDI in a year ranges from -2.02e+11 to 1.33e+11 REGRESSION AND CORRELATION a Set up model Regression displaying the relationship between the dependent variable Y – Foreign Direct Investment (FDI), and independent variables pog (X1 ), ir (X2 ), lac (X3 ), pud (X4 ) has the following form: General Regression Model FDI =β + β × pog+ β ×ir + β ×lac+ β × pud + u^ i Sample Regression Model ^ FDI = ^ β 0+ ^ β pog + ^ β ir + ^ β lac+ ^ β pud LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com b Analysing the correlation between independent variables Using function: corr fdi pog ir lac pud The result is as below: Table Result from running CORR between independent variables c Correlation relationship between variables  FDI and pog is positive The higher the population growth rate, the more FDI will be invested  FDI and ir is positive The higher the Inflation rate is, the more FDI will be received  FDI and lac is negative The higher the labour cost/worker wage is, the fewer FDI will be received  FDI and pud is negative The higher the public debt is, the fewer FDI will be invested Types of correlation relationship:  0.1 > r: no correlation  0.1 < r < 0.3: weak correlation  0.3 < r < 0.5: medium correlation  0.5 < r: quite strong correlation 10 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Overall, the independent variables not have a quite strong correlation relationship with the dependent one Especially, the variable “ir” has a very weak relationship d Running function Using function: reg fdi pog ir lac pud The result is as below: Table Result from running regression Variables Coefficients Values t p-values β0 -2.68e+09 -1.7 0.092 Pog β1 3.47e+07 0.68 0.496 Ir β2 5.85e+07 0.91 0.367 lac β3 250977.1 2.27 0.025 pud β4 -0.0545 -15.48 0.000 According to the above result, we now have: X1 General Regression Model: FDI=(−2.68e+09)+(3.47e+07) × pog+(5.58e+07)×ir +250977.1× lac -0.0545 × pud + u^ i Sample Regression Model: ^ FDI=(−2.68e+09)+(3.47e+07) × pog+(5.58e+07)×ir +250977.1× lac +0.0545 × pud + u^ i 11 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Or Y^ =(−2.68e+09)+(3.47e+07)× X 1+(5.58e+07)× X +250977.1 × X +0.0545 × X TESTING MODEL a Multicollinearity Why is Multicollinearity a Problem? If the goal is simply to predict Y from a set of X variables, then multicollinearity is not a problem The predictions will still be accurate, and the overall R-squared (or adjusted R-squared) quantifies how well the model predicts the Y values If the goal is to understand how the various X variables impact Y, then multicollinearity is a big problem:  One problem is that the confidence intervals on the regression coefficients will be very wide The confidence intervals may even include zero, which means one can’t even be confident whether an increase in the X value is associated with an increase, or a decrease, in Y Because the confidence intervals are so wide, excluding a subject, can change the coefficients dramatically and may even change their signs  The second problem is that the individual P values can be misleading (a P value can be high, even though the variable is important) Beside, there are some several other problems can interfere with analysis of results, including:  The t-statistic will generally be very small and coefficient confidence intervals will be very wide This means that it is harder to reject the null hypothesis  The partial regression coefficient may be an imprecise estimate; standard errors may be very large  Partial regression coefficients may have sign and/or magnitude changes as they pass from sample to sample  Multicollinearity makes it difficult to gauge the effect of independent variables on dependent variables Sources of Multicollinearity There are four sources of multicollinearity:  12 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com  The data collection method employed, for example, sampling over a limited range of the values taken by the regression in the population  Constraints on the model or in the population being sampled.   Model specifications, for example, adding polynomial terms to a regression model, especially when the range of the X variable is small.   An over determined model This happens when the model has more explanatory variables than the number of observations This could happen in medical research where there may be a small number of patients about whom information is collected on a large number of variables 13 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com It is important to understand the differences among these sources of the multicollinearity, as the recommendations for analysis of the data and interpretation of the resulting model depend to some extent on the cause of the problem The data collection method can lead to multicollinearity problems when the analyst samples only a subspace of the region of the regression Constraints of the model can cause multicollinearity An over defined model has more regression variables than number of observations These models are sometimes encountered in medical and behavioral research, where there may be only a small number of subjects (sample units) available, and information is collected for a large number of regression on each subject The usual approach to dealing with the multicollinearity in this context is to eliminate some of the regression variables from consideration Effect of Multicollinearity To assess multicollinearity, it should be noticed that how well each independent (X) variable is predicted from the other X variables And what is the value Variance Inflation Factor (VIF) When VIF value is high for any of the X variables, the fit is affected by multicollinearity We use VIF function to test multicollinearity of the model If at least one of the coefficience has VIF value is greater than 2, we can come to a conclusion that the model has multicollinearity The result is as follow: Table 6: Results from running VIF Mean VIF=1.29 < → Does not have multicollinearity 14 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com b Heteroskedasticity Heteroskedasticity has serious consequences for the OLS estimator Although the OLS estimator remains unbiased, the estimated SE is wrong Because of this, confidence intervals and hypothesis tests cannot be relied on In addition, the OLS estimator is no longer BLUE If the form of the heteroskedasticity is known, it can be corrected While studying classic linear regression model, we give out a hypothesis that the variance of each Ui in the condition that the given value of explaining variable X is unchanged, which means: u1=u 2=…=ui ; i=1,2, … , n However, in fact, because of the nature of socio-economics, the method of gathering and processing data or the wrong model, the hypothesis is violated causing heteroskedasticity The result of heteroskedasticity is that the minimum estimated square value is not efficient Therefore, the testing is no longer valuable { H : Homoskedasticity H :Unrestricted heteroskedasticity Therefore, if p-value is smaller than 0.05, we reject H0 and accept H1 We use white function to test the model's error The result is as below: 15 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Table Results from running Imtest, white Prob > chi2 = 0.0000 < 0.05, p-value = 0.0000 < 0.05 Hence, we reject H0 and accept H1, then there is heteroskedasticity c Testing Multiple Linear Regressions: F Test { H : β 0=β 1=β 2= β3 =β 4=β 5=0 H :there is at least coefficient ≠ Using test function, the result is as below: Table Results from running Test 16 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com p−value=0.1348>0.05 Hence, we accept H0 and reject the regression d Testing hypothesis in statistic { H : β 1=0  Pog: H : β ≠ 1 o Confidence Interval : (-6.59e+08; 1.35e+09) o  ∈Confidence Interval → Accept H0 o Population growth does not have statistically significant effect on Foreign direct investment { H : β 2=0  Lac: H : β ≠ o Confidence Interval : (31762.09; 470192.2) o ∉ Confidence Interval → Reject H0, accept H1 o Labour cost in one year has statistically significant effect on FDI { H : β 3=0  Pud: H : β ≠ o Confidence Interval : ( -0.0615 ; -0.0475) o ∉ Confidence Interval → Reject H0, accept H1 o Public debt has statistically significant effect on Foreign direct investment { H : β =0  Ir: H : β ≠ o Confidence Interval : ( -6.94e+07; 1.86e+08) o Confidence Interval  → Accept H o Inflation doesn’t have statistically significant effect on Foreign direct investment 17 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com IMPLICATION AND CONCLUSION As a whole, after working on chosen database and analyzing, our group suggest the best model to quantify the effects of some factors contributing to FDI.  In addition, to expand further, so how to increase in FDI of a country ? or What should  the government to improve FDI ?  Firstly, based on a review of the latest research on the role of population in economic growth and the determinants of FDI, it was hypothesized that a country's population would be positively related to FDI Large populations provide a large market for products and services, have a large labor force and a vast skill base Considering the advantages of a large population, it was hypothesized that investors would make larger investments in countries with larger populations So, to increase in FDI of a country, we also need to increase in population Secondly, when we decrease inflation rate, the FDI will increase because inflation rate and foreign direct investment are adversely related In other words with an increase in the inflation rate the inflow of foreign investment decreases The negative relationship between inflation and foreign direct investment is due to the fact that high level of prices in the country results in rising production costs This is due to the increase in input prices, cost of raw material, wages of labor, land prices and cost of capital Such high prices of product also adversely affects domestic as well as foreign demand for commodities Thirdly ,to increase in FDI , we should decrease in public debts when public debts is low, it will ensure the economy will develop stably and benefit when investing, then foreign investment will be effective, so FDI will increase Fourthly, the government should open markets and allow for FDI inflows Reduce restrictions on FDI Provide open, transparent and dependable conditions for all kinds of firms, whether foreign or domestic, including: ease of doing business, access to imports, relatively flexible labour markets and protection of intellectual property rights Fifthly ,the government should set up an Investment Promotion Agency (IPA) A successful IPA could target suitable foreign investors and could then become the 18 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com link between them and the domestic economy On the one side, it should act as a onestop shop for the requirements investors demand from the host country Finally, put up the infrastructure required for a quality investor: such as sufficient close-by transport facilities (airport, ports), adequate and reliable supply of energy, provision of an adequately skilled workforce, facilities for the vocational training of specialised workers, ideally designed in cooperation with the investor (Ibid.) Our report was made based on the contributions of members with knowledge gained from the process of studying and studying Econometrics This is also a hands-on opportunity for us to better understand the relevant analytical and characteristic tests, apply the knowledge in the lecture hall to self-learn and draw useful conclusions about phenomena in the various correlations and interplay between socio-economic phenomena Our team has completed the econometric model on the factors that affect FDI data Thus, through the results of the regression model, our team found that this data set when being included in the model was not really appropriate, the explanation of the independent variables was very low, and there were many errors in the process perform Through this, my group also sincerely thanks for the guidance and enthusiastic teaching of Ms Dinh Thi Thanh Binh Due to the limited knowledge and skills, this report cannot avoid mistakes, we are looking forward to receiving your encouraging suggestions so that we can improve and apply better in later jobs in the future 19 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ... increase in the inflation rate the inflow of foreign investment decreases The negative relationship between inflation and foreign direct investment is due to the fact that high level of prices in the. ..  An investment made by a firm or individual in one country into business interests located in another country in a year - Population growth (pog): The rate of the increase in the number of individuals... of a basket of selected goods and services in an economy increases over a period of time Rate of inflation is a crucial factor in influencing the inflow of foreign investment A high rate of inflation