Dynamic Effects of FDI, Trade Openness, Capital Formation and Human Capital on the Economic Growth Rate in the Least Developed Economies: Evidence from Nepal

Abstract

Abstract-The study investigates the linkage between FDI, trade openness, capital formation, human capital, and economic growth rate in Nepal using the vector error correction (VEC) model. The study reveals that a long-run equilibrium relationship exists between variables. Besides, trade openness and FDI have a dynamic positive effect on the GDP per capita growth rate in Nepal. On the other hand, human capital does not appear to be a significant factor, whereas capital formation demonstrates a negative association with rates of economic growth. The VEC based Granger causality test indicates that a unidirectional short-term causal flow runs between FDI, trade openness, and GDP per capita growth rate. However, the impulse response analysis reveals that this relationship is not stable rather volatile over time. The study suggests that Nepal should adopt more liberalized trade policy to attract foreign capitals and to ensure stable economic growth rate. Simultaneously, it needs to invest more in its human capital to reap spillover effects of foreign technologies on other sectors.

Does financial system development, capital formation and economic growth induces trade diversification?

“…The long-run relation between capital formation and trade diversification is negative and statistically significant as indicated by coefficient values and corresponding t-statistics and p-value. This result is contrary to the research findings of Yu (1998), Adhikary (2015), Adeola and Evans (2017). The possible reason of this dichotomy in the result is the fundamental differences in political, social and economic structures (Cadot et al, 2013).…”

Foreign Direct Investment and Economic Growth: Evidence from Bangladesh Economy

“…Following the theoretical models of the neoclassical, endogenous growth model and various empirical analysis models as like Borensztein et al (1998), Hoang et al (2010), Adhikary (2015) and econometric model sourced from production function framework where FDI has been taken as factor of input, along with Domestic investment, Government consumption, Exchange rate, Population size and, WTO. Following model is been used in this study-…”

“…The FDI and growth relationship is still a debatable issue in various factor but a majority of the macroeconomic studies indicates a positive relationship of FDI in economic growth in certain economic state (Lean and Tan, 2011;Alshehry, 2015;Adhikary, 2015). FDI can push economic growth through three major mediums.…”

Foreign Direct Investment and Economic Growth in South Africa: A Vector Error Correction (VEC) Model Approach

“…In analysing the dynamic stimuli of FDI on national output growth rate in Nepal, Adhikary (2015) applied the vector error correction (VEC) model to determine whether or not there was a long-term relationship between FDI and national output growth utilising annual time series data for the sample period 1985-2012. Estimates derived after a VEC-based Granger-Causality test was performed provided evidence that FDI had a statistically a substantial favourable effect on national output growth during the sample period 1985-2012.…”

“…Estimates derived after a VEC-based Granger-Causality test was performed provided evidence that FDI had a statistically a substantial favourable effect on national output growth during the sample period 1985-2012. Nonetheless, the 19941995199619971998199920002001200220032004200520062007200820092010201120122015 FDI inflows 32.2 2.3 -0.3 3.7 -0.9 1.7 -0.4 6.5 -0.8 -0.5 -0.1 8.3 -0.9 9.6 0.5 -0.2 -0.…”