1

The Nexus between Savings Gap, Foreign Exchange Gap, and Foreign Direct Investment Inflows into Asia: Two Gap Model Analysis with Panel Data Approach

International Journal of Science and Management Studies (IJSMS)
© 2023 by IJSMS Journal
Volume-6 Issue-3
Year of Publication : 2023
Authors : Piyali Roy Chowdhury, Anuradha A
DOI: 10.51386/25815946/ijsms-v6i3p115
Citation:
MLA Style: Piyali Roy Chowdhury, Anuradha A "The Nexus between Savings Gap, Foreign Exchange Gap, and Foreign Direct Investment Inflows into Asia: Two Gap Model Analysis with Panel Data Approach" International Journal of Science and Management Studies (IJSMS) V6.I3 (2023): 166-177.

APA Style: Piyali Roy Chowdhury, Anuradha A, The Nexus between Savings Gap, Foreign Exchange Gap, and Foreign Direct Investment Inflows into Asia: Two Gap Model Analysis with Panel Data Approach, International Journal of Science and Management Studies (IJSMS), v6(i3), 166-177.
Abstract:
The study analyses the nexus between Savings (Savings- Investment), Foreign Exchange (Import- Export) Gap and net Foreign Direct Investment (FDI) inflow into Asian Countries. Economies for this analysis are taken from Newly Industrialised Countries (NICs) based on the valuation of GDP of the respective countries. Six countries, such as, China, India, Indonesia, Thailand, Malaysia and Philippines are considered for this study over a period 1982-2016. Using Panel Data Approach, the analysis has been able to find out a long run cointegration between Savings Gap and FDI as well as Foreign Exchange Gap and FDI. As proposed by Two Gap Model, the influence of FDI has been found on both the variables. Whereas the effect of savings gap on net FDI inflow is positive and significant for the said period with a negative Error Correction Term which proves the movement from short run disequilibrium to long run stable equilibrium. After proving the direction of causality, the short run joint influence of savings gap with its lagged values has been checked. Through Wald Test, the result is proved to be significant. On the other hand, the effect of Foreign Exchange Gap on FDI is not significant in nature. Finally, from the study, it is suggested that if domestic savings for all the six countries together are given importance from the level of respective Governments, the Savings Gap may be reduced which will indicate less dependence on foreign investments into these countries. Being NICs, self-funding of future investments is always preferred which is only possible if countries are contended with adequate capital accumulation on their own in previous periods.
Keywords: Two Gap Model, Foreign Exchange Gap, FDI, Asia, Panel Data.
References:
[1] Adom, A. D., & Elbahnasawy, N. G. (2015). Saving-investment Gap and economic growth in developing countries: Simulated evidence from selected countries in Africa. Science and Education Studies, 9.
[2] Akande, E., & Oluyomi, O. D. (2010). The Two-Gap Model of Economic Growth in Nigeria: Vector Auto regression (VAR) Approach.
[3] Attanasio, O. P., Picci, L., & Scorcu, A. E. (2000). Saving, growth, and investment: a macroeconomic analysis using a panel of countries. Review of Economics and Statistics, 82(2), 182-211.
[4] Bacha, E. L. (1990). A three-gap model of foreign transfers and the GDP growth rate in developing countries. Journal of Development economics, 32(2), 279-296.
[5] Baxter, M., & Crucini, M. J. (1993). Explaining saving--investment correlations. The American Economic Review, 416-436.
[6] Beck, T., & Levine, R. (2004). Stock markets, banks, and growth: Panel evidence. Journal of Banking & Finance, 28(3), 423-442.
[7] Brouwer, J., Paap, R., & Viaene, J. M. (2008). The trade and FDI effects of EMU enlargement. Journal of International Money and Finance, 27(2), 188-208.
[8] Dean, A., Durand, M., Fallon, J., & Hoeller, P. (1989). Saving trends and behaviour in OECD countries.
[9] Domar, E. D. (1946). Capital expansion, rate of growth, and employment. Econometrica, Journal of the Econometric Society, 137-147.
[10] Evans, M. D. (2017). External balances, trade and financial conditions. Journal of International Economics, 107, 165-184.
[11] Freund, C., & Warnock, F. (2007). Current account deficits in industrial countries: the bigger they are, the harder they fall? In G7 current account imbalances: sustainability and adjustment (pp. 133-168). University of Chicago Press.
[12] Gocer, I., Akin, T., & Alatas, S. (2016). The effects of saving-investment gap on economic growth in developing countries: A clustering and panel data analysis. Theoretical & Applied Economics, 23(2).
[13] Goh, S. K., & Tham, S. Y. (2013). Trade linkages of inward and outward FDI: Evidence from Malaysia. Economic Modelling, 35, 224-230.
[14] Harrod, R. F. (1939). An essay in dynamic theory. The economic journal, 49(193), 14-33.
[15] Im, K. S., Pesaran, M. and Shin, Y. (2003), “Testing for Unit Roots in Heterogeneous Panels”, Journal of Econometrics 115, 53‐74.
[16] Ito, T. (2001). Growth, crisis, and the future of economic recovery in East Asia. Rethinking the East Asian Miracle, 55-94.
[17] Johansen, S. (1988), “Statistical Analysis of Cointegration Vectors”, Journal of Economic and Control 12, 231‐254.
[18] Kao, C. (1999), “Spurious regression and residual‐based tests for cointegration in panel data”, Journal of Econometrics 90, 1–44.
[19] Kayalvizhi, P. N., & Thenmozhi, M. (2017). Does Quality of Innovation, Culture and Governance Drive FDI?: Evidence from Emerging Markets. Emerging Markets Review.
[20] Levin, A., Lin, F. and Chu, CJ. (2002), “Unit Root Tests in Panel Data: Asymptotic and Finite‐Sample Properties”, Journal of Econometrics 108, 1–24.
[21] Levy, V. (1984). The savings gap and the productivity of foreign aid to a developing economy: Egypt. The Journal of Developing Areas, 19(1), 21-34.
[22] MacKinnon, J. G., Haug, A. A. and Michelis, L. (1999), “Numerical Distribution Functions of Likelihood Ratio Tests for Co‐integration”, Journal of Applied Econometrics 14, 563‐577.
[23] Maddala, G. S. and Wu, S. (1999), “A Comparative Study of Unit Root Tests with Panel Data and A New Simple Test”, Oxford Bulletin of Economics and Statistics 61, 631–652.
[24] Mihalache-O'Keef, A. S. (2018). Whose greed, whose grievance, and whose opportunity? Effects of foreign direct investments (FDI) on internal conflict. World Development, 106, 187-206.
[25] Moosa, I. (2002). Foreign direct investment: theory, evidence and practice. Springer.
[26] Pedroni, P. (1999), “Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors”, Oxford Bulletin of Economics and Statistics 61, 653‐670.
[27] Sayari, N., Sari, R., & Hammoudeh, S. (2018). The impact of value added components of GDP and FDI on economic freedom in Europe. Economic Systems.
[28] Van Wijnbergen, S. (1986). Macroeconomic aspects of the effectiveness of foreign aid: On the two-gap model, home goods disequilibrium and real exchange rate misalignment. Journal of International Economics, 21(1-2), 123-136.