FDI Vs Trade - Last

FDI & Trade Vs
Economic Growth
Presented to:
Dr. AHMED MABROUK
Prepared By;
Hossam Adel
Bassem Dyab
Ahmed Mohye
Dalia Mohamed
Heba Azzam
Outlines
Introduction
Research Question
Literature review
FDI and Economy
Trade and Economy
Trade and FDI
Turkey
Data interpretation of Turkey

Relation between FDI, GDP, Trade
Conclusion
Introduction
FDI and Trade are viewed through many economical

studies and theories as the important key players
affecting the economic growth of developing nations.
Some theories tend to prove that FDI is more suitable
for growing economies as it sees these economies eager
for capital, yet FDI is seen as the water that quenches
this thirst.
On the other hand some other theories look to FDI as
temporary effectors on economic growth as it may
destroy domestic capital investments as FDI has the
power of capital, developed technology, knowledge
and market access which may negatively reflected on
the long run of economic growth.
Most developing countries take trade as an engine for

economic growth. They depend on export as a
development strategy that put industrial companies
into competition and hence creates industrial
development and push the economic growth.
While the import substitution schools believes that
trade protection and industrial policies are constrains
on ability to conduct microeconomic policy.
Debates about trade and FDI and the linkage to
economic growth are still a subject of many studies
and theories specially after the big change happened
by the BRICS (Brazil, Russia, India, China and South
Africa) which prove a growth lead by developing
countries against the G7 economies
(the United States, Canada, France, Germany, Italy,
Japan, and the United Kingdom).
Our study in taking Turkey as a model for
economic growth changes as FDI & Trade had
the great effect on this development in the
recent 2 decades that was subject to many
studies in this regard.
Research Questions:
The Effect of FDI on Economic Growth
The Effect of Trade

( export and import and net trade )
The relation between FDI and Trade elements

Individually and collectively and their effect on
economic growth
Literature review
FDI ECONEMY
The neoclassical and endogenous growth models can

be considered as a theoretical foundation for FDI led
economic growth hypothesis of a country.
The neoclassical growth theories assume that FDI can

channel required funds to the productive sectors of a
capital shortage economy which, in turn, help increase
the economic growth rate by increasing the marginal
productivity of capital
On the other hand, the endogenous growth theories
state that the long-run growth of a country is not only
influenced by the volume of physical investment but
also depends on the efficiency of utilizing investment.
Therefore, endogenous growth model focuses on

incorporating organizational, managerial, technical
and human skills, innovation and technological
progress, and accumulation of knowledge
endogenously in the growth theories that are often
brought by FDI
Despite this positive link between FDI and economic
growth, empirical evidence also reveals negative
association between them.
The dependency theories also argue that foreign

gigantic players may create negative effect on the
growth and development of domestic firms of a host
country in the long-run as they have large volume of
capital, superior technologies, higher market access,
advanced marketing networks and better managerial
and human relation skills
TRADE ECONEMY
Export-led economic growth hypothesis.
the argument is exports increase factor productivity

because of better utilization of capacity and
economies of scale.
Exports are likely to alleviate foreign-exchange

constraints and thereby facilitate importation of
better technologies and production methods.
Open trade regimes go hand-in-hand with good
investment climates, technology externalities, and
learning effects.
In the long run, trade openness may encourage to

economic growth by diffusing technical
knowledge by importing high-tech items and from

the spillover effects of foreign direct investment
(FDI) for instance
Other studies, however, that question the wisdom of
trade openness.
j-curve relationship between trade liberalization and

economic growth; they also illustrated that trade
increases economic growth at certain levels of trade
liberalization and then declines it.
FDI TRADE
Multinational corporations (MNCs) the link between

the FDI and trade is underscored in the following
principle.
Operations of MNCs can be vertically linked with

the host nations, an increase in MNCs activities will
generate demand for intermediate goods and
capital goods from the home nation
FDI could be complementary or substitute and it
depends on the nature of FDI.
If it is a substitute for imports it improves the host

country's balance of payment position indicating
that FDI is used for exports. However, if it is
complementary the balance of payment is
adversely affected.
Horizontal investments in which a firm sets up

abroad to produce the same products that it
produces at home
Vertical investments in which the production
process is decomposed by stages according to
factor intensities in different countries
Theories of horizontal MNCs suggest they are

substitutes
Vertical MNCs suggest that FDI and trade are

complements. Here, firms geographically separate
different production stages across countries to take
advantage of lower factor prices
FDI and trade in economic growth of developing
countries, FDI and trade contribute toward
advancing economic growth in developing
countries. There is a strong, positive interaction
between FDI and trade.
TURKEY
FDI inflows and domestic investments on the economic

growth in Turkey during the period 19802012
There was a long run relationship among the economic

growth, FDI inflows and DI.
FDI inflows had negative effect on economic growth,

while gross domestic investments had positive impact
on economic growth.
Foreign direct investments (FDI) and import growth in
Turkey over the period 1950 to 2004.
FDI, GDP, and domestic price affect import demand

Causal relationship running from exports to economic
growth in Turkey from 1987-I to 2002-IV.
The study did not find significant positive spillovers from

FDI to GDP. Furthermore, the findings do not suggest a
kind of FDI-led export growth linkage
(FDI), import service sector, and export service sector
over 1980 to 2012.

An increase in the export service sector level shows that it
promotes imports.
Also the results of the study show that an increase in the export
service sector level stimulates inward FDI.

Trade openness on economic growth in the case of
Turkey
Sample period 1960 2014
In the short run, trade openness promotes economic
growth
In the long run this relationship is positive and
statistically insignificant
Data interpretation
FDI Vs Economic Growth
2001 to 2007
Seems to be a correlation in pattern though momentum
seems to vary that suggests presence of other factors
involving in GDP performance .
2009 2010
Sharp decline in both GDP and FDI might suggest a direct
causal effect
2011 to 2016
Almost complete mismatch between the two factors in terms
of performance pattern and magnitude . the reason could
be attributed to other more powerful factors intervenes the
GDP performance .
Trade VS GDP
Exports vs GDP
There seems to be a significantly strong resemblance between the two
factors performance curves . That emphasises the role of exports as a
determinant of GDP performance .
Imports Vs GDP
Surprisingly there is a semi complete matching between both imports and
GDP magnitudes .
There are many reasons for that requires investigation but may be attributed
to importing production goods or just imports due to improvement in economic
conditions .
Trade balance Vs GDP
2001 t0 2007
Increase in the negative gap between exports and imports
accompanied by increase in the GDP.
2008-2009
Sharp improvement in trade balance accompanied by
sharp decline in GDP
2010 to 2014 deficit in trade balance increases and then

decreases from 2014 to 2016 . on the GDP side we find the
same pattern inversely applied.
We can conclude a negative correlation between trade balance

and GDP . A finding that is contrary to the classical equation of
GDP = C+I+G+(X-M)
IMPORTS , EXPORTS VS FDI
IMPORTS , EXPORTS VS FDI

There is a perfect match between exports and FDI .
That suggests a strong positive correlation between the two measures and
implies a positive impact of FDI on exports .
Matching between imports and FDI is almost perfect in pattern, that might
be attributed to the need for production goods that are not available
domestically .
Major GDP sectors VS Imports
MAJOR GDP SECTORS VS IMPORTS

We can find a direct matching between imports and both GDP from construction
and manufacturing . this matching is lost completely when comparing these
variables to the GDP from agriculture .
FDI , EXPORTS ,IMPORTS

Conclusion
Thisstudy was conducted on the Turkish module . it

studied the past 16 years
We found a direct correlation between FDI and GDP

performance in terms of pattern and magnitude .
We could find direct correlation between exports and

GDP which implies a strong role of exports in GDP
performance improvement.
Surprisingly we could find an identical positive

correlation between imports and GDP
Conclusion
We could find an identical positive correlation that links
increase in trade deficit and increase in GDP . this is
totally contrary to the mathematical equation .
A very meaningful reason for the previous finding would

be the nature of imported goods . these would be
production goods that tremendously enhanced both
construction and manufacturing sectors .
The governmental expenditure would have been

increased especially in construction and infra structure
and that has led to both increase in FDI and GDP
according to the equation
THANKS

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FDI & Trade Vs

Trade and Economy

Trade and FDI

Data interpretation of Turkey

FDI and Trade are viewed through many economical

Most developing countries take trade as an engine for

The Effect of FDI on Economic Growth

The Effect of Trade

The relation between FDI and Trade elements

The neoclassical and endogenous growth models can

The neoclassical growth theories assume that FDI can

Therefore, endogenous growth model focuses on

The dependency theories also argue that foreign

Export-led economic growth hypothesis.

the argument is exports increase factor productivity

Exports are likely to alleviate foreign-exchange

In the long run, trade openness may encourage to

knowledge by importing high-tech items and from

j-curve relationship between trade liberalization and

Multinational corporations (MNCs) the link between

Operations of MNCs can be vertically linked with

If it is a substitute for imports it improves the host

Horizontal investments in which a firm sets up

Theories of horizontal MNCs suggest they are

Vertical MNCs suggest that FDI and trade are

FDI inflows and domestic investments on the economic

There was a long run relationship among the economic

FDI inflows had negative effect on economic growth,

FDI, GDP, and domestic price affect import demand

The study did not find significant positive spillovers from

over 1980 to 2012.

service sector level stimulates inward FDI.

2010 to 2014 deficit in trade balance increases and then

We can conclude a negative correlation between trade balance

IMPORTS , EXPORTS VS FDI

MAJOR GDP SECTORS VS IMPORTS

FDI , EXPORTS ,IMPORTS

Thisstudy was conducted on the Turkish module . it

We found a direct correlation between FDI and GDP

We could find direct correlation between exports and

Surprisingly we could find an identical positive

A very meaningful reason for the previous finding would

The governmental expenditure would have been

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