Economic Paper

Trade Openness, Foreign Direct Investment and Infrastructure Spending:

A comparative analysis of their common role in the economic development between selected developed and developing economies

Yasser M Alwafi

Department of Economics

Eastern Illinois University

Abstract

The This paper examines the literature on how trade, foreign direct investments, and infrastructure development affect economic growth of selected developed and developing economies. A comparative analysis will be carried between developed economies (G7 countries) represented by Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States while the developing economies are represented by Brazil, Russia, India, China and South Africa. The comparative analysis will be carried between years 1985 to 2015. In addition, the paper will establish the relationship between trade and economic growth in both developing and developed economies. Furthermore, the paper will establish that trade variables in both developed and developing economies is captured in three indicators namely, the sum of exports and imports to the Gross Domestic Product (GDP), the ration of imports to the GDP and the sum of exports to GDP. Comment by Econ16: Ratio?

This study utilizes a panel data approach to formed and capture the threshold effect between economic growth and trade. Moreover, the relationship between Foreign Direct Investment (FDI) and economic growth will be analysed. The research will depict that trade and FDI are expressed as the ratio of GDP in both developed and developing economies. In addition, the co-relation between the FDIs and the GDP rate is inherent to the volume of investments brought into the host country. Moreover, the relationship between infrastructure represented as GCF and economic development in both developing and developed economies will be discussed by this proposal. The proposal will establish that infrastructure outputs such as power, transport, and water are used as production inputs in productive sectors such as manufacturing and agriculture, therefore forming a close relationship between GDP and infrastructure. The study will conclude by establishing the relationship of the three variables (trade liberation, FDI and infrastructure spending) in economic development in both developed (G7 economies) and developing economies (BRICS economies).

INTRODUCTION

Developed and developing economies depend on trade, FDI, and infrastructure to spur their economic growth. The differences between the economic growth paths can be attributed to the volumes of investment in these three variables. The relationship between trade and development has dominated the debate in developmental economics and trade. Developed economies trade more thus high economic growth path. The study depicts that there exists a long run relationship between trade and economic growth. In addition, the study depicts that trade and economic growth are co-related, but their relationship is fortified by the stability in macroeconomic policies. From , the analysis, negative some macroeconomic variables such as inflation can constrain economic growth. Developed economies have embraced openness to trade which plays a crucial role in economic growth. In addition, the reduction and elimination of barriers to trade promote trade growth thus ultimately raise the GDP of the developed economies. Empirical evidence indicates that there is a trading threshold that exists between trade openness and economic growth. Developing countries must have more effective policies towards openness to trade in particular when controlling a level of imports thus boosting their economic growth through international trade. Comment by Econ16: Not a sentence. Comment by Econ16: This is done with co-integration tests. All I see are panel results. Comment by Econ16: Again, you seem to be making a co-integration argument.

Although there may be no considerable evidence link between the FDI and economic growth, FDI may be a recipe for economic growth in both the developed and developing economies. FDIs are expected to boost the host economic growth, it’s evident that the extent of FDI growth depends on a country-specific characteristics. In particular, the FDI tends to promote economic growth of host countries with liberal trade regimes such as developed economies. Moreover, developed economies have open and liberal trade regimes, improved education thus human capital conditions encourage export-oriented FDI hence maintaining macroeconomic stability. Developing economies policymakers should focus on strategies and policies that promote economic growth thus attracting FDI inflows into their regions. Empirically, the FDI boosts the host economy via accumulation of capital by an introduction of new goods and the subsequent introduction of foreign technology thus enhancing the stock of knowledge in the host country through the transfer of skills. Developed countries benefit from the FDI by the increasing capital and technical spill overs. In addition to that FDI represents the potential source for sustainable growth and development given its ability to assist in human capital development and formation, generate spill overs in technology, and assist the host countries to integrateion to global economy trade. Furthermore, the developed economies ensure the existence of competitive business environment thus enhancing the development of FDI enterprise. Comment by Econ16: rewrite

FDI inherent to developed economies complemented the domestic savings by conferring foreign savings. The developed economies balance of payment receipts is augmented since the FDI fills the funding gap between the investment requirements and the local savings. According to the United Nations Conference on Trade and Development (UNCTAD), FDI has proven to be a stable source of funding since it is based on the long-term view of the growth potential of the recipient nation, access to wider markets and accessibility of raw materials. Therefore, as a result, individual countries have been seeking policies that attract FDI. Developing economies should seek FDIs to spur economic growth thus reducing macro-economic detrimental effects such as poverty.

Infrastructure forms the base in which Economic growth is realized. Infrastructure encompasses the roads, water, mass transport, airports, and utilities. Infrastructure aids support services to help grow productive sectors such as agriculture and industrialization. The pro-founding relationship between infrastructure and economic growth is quite complex. Although infrastructural development is necessary and an important form of economic growth and industrial take-off, the desire for a country’s growth is not directly proportional to higher or an increased need for infrastructure. In developed economies, infrastructure exhibits high network effects. As the number of users increases, the marginal productivity of infrastructural investments increase. In addition, the spread of networks surpasses the average productivity inherent to investment until the market is all saturated.

Developing economies still lag behind in economic development due to decades of economic stagnation, poor living standards and sometimes environmental disasters which have left infrastructural development underutilized. Investment in infrastructure as a GDP proportion is about 10% in comparison to 16% in developing countries. In addition, less than 50% of the region’s roads are paved. In addition, about 1/3 of the population of the region are within two kilometres of the seasoned roads in comparison to 2/3 in developed economies regions of the developed economies. Telephone penetration in developing economies is about 14% in comparison to an average of 52% in developed economies. Developing Economies economies lack resources to undertake infrastructural development. In addition, they lack reliable data to determine manpower and finance for infrastructural development. Many developing economies lack the infrastructural development framework that may guide them to achieve economic development. Moreover, the developing economies exhibit inadequate planning which mismatches societal needs and requirements. On the other hand, developed economies have well-functioning supporting institutions and stable political environments. Comment by Econ16: developed?

Developing economies need to save annually by eliminating all inefficiencies and also carry 100% capital budget execution. The relationship between infrastructure and Economic economic growth is two-way. First, infrastructure creates growth in the economy andand on the other hand, economic growth brings infrastructural changes. Practically iIn both the developed and developing economies, infrastructure provides the keys to all modern technology in all sectors. Studies have also depicted that around 9% of the value added is contributed by infrastructure in developing countries, while 11% comes from the high-income economies. As income levels rise, so as does the composition of infrastructural changes. In developing economies, basic infrastructure such a water, irrigation and transport grows fast and is of high demand. In high-income countries, power and telecommunications are of more importance. Empirical studies have shown that 20% increase in public investment in infrastructure accelerates real economic growth by 1.8% in the medium to long-term.

LITERATURE REVIEW

The empirical literature on trade and economic development became predominantly important in the 1980s. In 1982 many developed economies faced debt crises and economic meltdown, diluting the impact of trade protectionists. The empirical literature suggests the positive relationship between trade and economic growth of both developing and developed economies. Makki & Somwaru (2004) investigated whether trade spurs economic growth and found a positive relationship. A further analysis by Rodriguez & Rodrik (2000) revealed that the relationship between economic growth and exports in four developed and four developing economies using the error correction and co-integration model. His Their findings depict a stable long-run relationship and a bi-directional causality relationship between economic growth and growth of exports. In addition, the favourable expansion of balance of trade is dependent on efficient management of imports, and market-oriented and institutions of competitive market strategies for expansion of exports. Trade liberalization increases a country’s level of competitiveness and efficient production efficiency in the of domestic sector. Blanchard & Leigh (2013) argues that trade liberalization benefits the economy through efficient resource allocation inherent to social marginal costs and benefits thus opening access to better technology and production inputs. Therefore developed and developing economies taking can take advantage of economies of scale thus providing favourable growth.

According to the theory of comparative advantage, if a country wishes to trade with another country, the country produces exports the goods it has the comparative advantage onwith. The latter is deemed tocountry specializes in the sector it has better factor endowments in, thus producing the goods on a large scale. Therefore as result, exports and productivity will rise thus boosting the overall economy. Blanchard & Leigh (2013) argues that trade liberalization encourages countries to specialize in sectors in which they possess high economies of scale thus promoting productivity and efficiency in the long run. Moreover, the new endogenous model suggests the positive relationship between trade openness and growth of economies is a result of advanced technologies as denoted by Blanchard & Leigh (2013). Developed economies have a higher degree of openness thus possess a greater ability to use the technologies generated to grow more rapidly. Comment by Econ16: Don’t know what you mean.

Developing economies, on the other hand, have low imitation to technologies’ thus a sluggish economic growth. However, the same opposite arguments depicts that trade openness may be damaging to economic progress. This occurs in the case a county specializes in development and research activities which are not the core of the country economic activities. Moreover, the composition of trade in goods terms matters a lot in determining the growth effect. Empirical analysis has analysed the relationship between trade and development bringing up mixed and conflicting methodologies in both developing and developed economies. The studies study carried out by Czinkota & Ronkainen, (2013) confirm that there is a positive effect of trade on the growth of trade. On the other hand, Johnson (2013), explains suggests that there is a weak relationship between economic growth and openness to trade. Johnson (2013) further suggests that lower-income countries benefit more from international trade than the developed economies s. In a study of four developed economies and developing economies, the report research shows a positive correlation between trade openness and economic growth. However, below the threshold level, trade have has detrimental effects on economic growth as witnessed in Brazil (a developing economy). Comment by Econ16: rewrite Comment by Econ16: I’m not sure what you mean here.

Shahbaz et al. (2009), found no causal relationship between economic growth and exports in Brazil. However, the findings have been challenged by Zecchini (2013), who confirmed the trade led growth hypothesis for Brazil. Shahbaz et al. (2009), apply the quartile regression as an indicator of exploring the trade growth nexus for developing nations. Their results are a clearer indication that trade openness is higher and robust in developing countries than in developed economies. Moreover, using the instrumental variable regression to examine the effects of trade income variation with economic development, the results indicate that trade openness has a profound positive impact on financial development, economic growth and capital accumulation in developed economies (Makki & Somwaru, 2004). On the other hand, trade Trade openness also has a profound impact on economic growth and real income. In both developed and developing economies, the real effect of trade depends on inflation and financial development. The openness of trade has a negative effect on growth in countries with low financial development in the long run and in the short run. The causal relationship running from trade openness suggest that trade openness stimulates both investment and economic growth. Besides, the trade policies such as the real effective exchange rate and the tariff rate affect the country’s economic performance through trade. In a more recent work, the instrumental variable approach depicts suggests that trade openness a increases economic growth in both long run and the short run since the investment ratio has a positive impact on the economy is a short run.

Foreign direct investment (FDI) has been viewed as powerful influencing influence on economic growth directly in the recent past. A number of researchers examining the relationships between FDI and economic growth depict suggest that FDI-EG relationships are significantly positive. Within this scope, there exist several influencing factors such as influencing human capital, well-developed financial markets, open market regimes and the complimentary domestic and foreign investment. In the 1990s, FDIs was the principal source of flow in developing nations. FDIs, unlike other capital inflows, has a fewer degree ofless volatilityies thus and typicallyit does not follow the economy’s pro-cyclical behaviour. Studies have shown that FDI has increased since the late 1980s to 2000s worldwide. The World Trade Organization (WTO) postulates that FDIs occurs when an investor in the home country acquires assets into the host country with the intention of managing the asset. The management aspect distinguishes it from the portfolio investment in bonds, stocks and other financial instruments. Studies by Shahbaz et al. (2009) depict that FDI inflows are the basic policies that support developing economies over the last two decades. In addition, the Brussels Declaration and Programme of Action for the LDCs’ (BPoA), 2010 stated that foreign exports demand is more essential than domestic demand. Sbia et al. (2014) depicted added that FDI is a major finance source thus it can facilitate technology entrance from advanced and developed economies to the host country. In a Keynesian setting, the net exports represents the country output external demand which can lead to improvement of the real output. There exist different channels between exports and FDI growth. On the basis of the hypothesis, the outward looking economies are bound to experience higher growth rates. Oatley, T. (2015) FDI enhances the production efficiency and promotes specialization and productivity inherent to the host nation. In additional, FDI improves managerial experience, job skills, employment, exports markets and tax revenues. Egger & Pfaffermayr (2004) employed a fixed panel data approach to examine the effects of trade and FDI on the real growth of per capita GDP in developed and developing nations. In his analysis, heThey found a significant positive trade effect on FDI in developing economies. In addition, when controlling the effect of domestic trade and investment, FDI posed a positive impact. The study of Oatley (2015) investigates the casualty relationship between FDI inflows and economic growth I in developing g economies using the Granger causality test and the bounds test. When the real GDP was postulated as the dependent variable, the bound test suggests some level of relationship between the FDI and the real GDP. In the long run, the result indicated the unidirectional causality from GDP growth to FDI. Moreover, Hsiao & Hsiao (2006) carried out Granger causality tests between exports, GDP and FDI in developing nations using panel data and time series for the last decade. Empirical analysis depicted that each country has a different causality relation, while the results of the Panel-VAR causality y depicted that’s FDI has indirections’ an effect of on GDP indirectly and directly through exports. In addition to that, there also exists a bi-directional causality between GDP and exports. The analysis also depicted suggested that exports may be a good substitute if not complementary to human capital or financial development through its relationships with FDI and the GDP. Oatley, T. (2015) determined the effect of FDI on macroeconomic indicators such as GDP, export and employment on within developing the economyies. The results indicate that FDI had a negative impact due to a low be level in Greenfield investments. Borensztein, De Gregorio & Lee (1998) studied the effect of FDI on economic growth in a cross country regression by using data from developing industrial economies. The results s indicate that FDI is an important driver in technology transfer which contributes more to economic growth and development more than the domestic investment. The empirical evidence stated inferred that higher productivity in the FDI is possible when the host country has a minimum human capital threshold stock. Also, the findings depict suggest a bidirectional casualty between FDI and GDP. A study carried out by Rodan (2016) examined the role of trade and FDI for developing nations. The findings depicted suggested that FDI, Trade, domestic investment and human capital are important sources of economic growth and development. In addition, they it found a strong interaction between trade and FDI in realizing economic growth. Comment by Econ16: Trade to FDI or FDI to trade? Comment by Econ16: What is that?

Infrastructure has the profound role into a country economic growth and trade. One approach to determine the measure the impact of trade facilitation is the gravity model which assess the impact of trade facilitation measures on bilateral trade flow. Snieska & Simkunaite (2009) assessed the impact of four trade indicators related to economic growth which included, CT, physical infrastructure, transport efficiency and telecommunications. As a matter of principle, physical infrastructure had the greatest impact on exports. Other studies that have utilized the gravity model lay a strong emphasis on the role of infrastructure on trade. Bilateral trade flows Iin developed economies are affected by transport infrastructure and ICT. Studies have shown developing economies have less developed roads and port, poorly performing customs agencies and weaken regulatory capacities. In addition, they have limited access to business and finance which affects trade thus affecting economic growth adversely. Snieska & Simkunaite (2009) found that improving port and airport efficiency positively impacted trade and thus accelerating accelerated economic growth. Empirical studies suggest that differences in transport costs between the developing and developed nation account for different inability to compete in international markets. Roller & Waverman (2001) suggest that better transport and infrastructural services improve international access to markets thus increasing trade with respect to economic development. Adopting the study from Snieska & Simkunaite (2009), the role of infrastructure in clothing, automotive and textile factors is major trade input determinant. The incorporated bilateral tariff, the quality of roads and airport affect the turnover period of goods and services. The study proved that infrastructure was key companioned in development of trade with respect to economic growth in both developed and developing economies. Comment by Econ16: What is CT? Comment by Econ16: I don’t know what you mean. Comment by Econ16: What is ICT?

Relation between Trade and Economic Growth

The relationship between trade and economic growth has been a point of debate since Adam Smith’s discussion of specialization. Adam Smith postulated that economic growth can be derived from trade in the form of import substitution a versus the export growth led growth (Panayotou, 2016). In addition that he investigated the effects of trade on standards of living exhibited by citizens in developed and developing Economies. Evidently,He inferred that trade policies play a crucial role in facilitating economic growth. Trade may affect the household incomes through specialization arising from realizing comparative advantage, realization from returns of economies of scales, technological spill overs from investments, improved communication channels, exposure to new services and goods, new production methods and new ways of organization behaviour. The relationship between trade and economic growth should be evaluated on ain the long run since it permits deviations occurring in the short run when variables adjustments for equilibrium occur. In the long run, all equilibrium values ad formulations are bases on variables equilibrium. In the recent past, there hasve been growing theoretical evidence in developing and developed economies of in growth of trade and the impact on economic growth and development (Johnson, 2013).

Developing economies have been struggling to come up with a comprehensive review of key issues that link trade and economic growth. According to the World Ddevelopment report Report (2012), trade is a powerful tool through which globalization gains can be distributed amongst nations since as the economies grow, so as the trade becomes more open as suggested by Erokhin & Heijman (2014). Should the developing nations relax exchange controls thus increasing more investment opportunities? The increase in investments (either direct or indirect) increase a country economic growth. Investment activities are facilitated by creating opportunities for trade and also creating an enabling an environment that can attract foreign investors and multinational companies. However, the benefits of trade are dependent of nature, goods production, domestic economic policies pursue. Comment by Econ16: Rewrite – doesn’t make sense.

The dynamic and the static gains made from trade arises from the theory of comparative advantage, the effect of trade on a level of investment and the state of technical know-how of a country. Erokhin & Heijman (2014) stipulated that trade can promote economic growth through technology spill overs and external trade stimulation. An endogenous economic model demonstrates the importance of knowledge accumulation and the importance of technological progress in developed economies; that therethis implies that there is a need for continuous accumulation of technological growth for sustained economic growth in the long term. The model postulates the long run growth can be attributed by from diffusing technology and knowledge. Taylor (2007) presented the model that reactedwith trade policy and economic growth, popularly known as the two gap policy, which defines the poor economic growth in the developed economies. Using Data from Brazil, productivity per capita increased from 2% to 3% every financial, year in the ratio of trade to Gross Domestic Product, therefore, confirming the interdependency between economic growth and trade. Johnson (2013) found a robust two chain link between trade and economic growth in developing economies. The study revealed a robust correlation between the share of investment in GDP and economic growth. Similarly, Oatley (2015) estimated a growth model using GDP as the dependent variable and trade variables as the explanatory variables. The result of the model suggested that trade volumes are a function of economic growth, however, macroeconomic variables such as the real exchange rate strongly influence imports and export exports directly. In addition, they he also found that investment affects economic growth directly and o the other hand investment is affected by trade policies. In addition to that, theyHe also found that trade opens through trade liberalization is crucial in bringing the positive relationship between economic growth and trade in developing economies. Comment by Econ16: What is that? Comment by Econ16: What is that?

The quality of economic growth is brought up by the proportions of exports and the quality of output. A country’s exports are is the main source of income and the engine of a country’s growth since a successful export drive e stimulates a positive trade multiple on the economy. Exports can improve the growth in developed and developing economies GDP by increasing incomes and raising employment leaves in the export sector and in the technological development. As Egger & Pfaffermayr (2004) postulates exports aret is a key item in promoting economic growth.

On the other hand, imports are is linked to the economic growth although the two are competing effects of supply and the demand side. On the demand side, exports sat are termed as leakages as they are the constraint to economic growth. On the other hand, the import constraints are eased with trade linearization policies coupled with the efficiency gains on the supply side. Critics confirm argue that the empirical evidence that imports and economic growth are complementary is inconclusive and mixed. Economists argue that if the increased GDP is the source of finance for imports, growth can be constrained, thus having a negative impact on economic growth (Egger & Pfaffermayr, 2004). Comment by Econ16: I don’t know what you mean – imports are a leakage, but not exports.

The Link between Trade Openness and Long-Run Economic Growth

The relationship between trade openness and economic growth have been investigated widely, yielding to inconclusive and mixed results. The differences between the results may be attributed to an omission of labour and capital stock in the trade and growth matrix. The impact of trade openesss s on economic growth is examines examined in the multivariate framework that includes labour, trade openness and capital stock as the regresses (Erokhin, Ivolga & Heijman, 2014). Additionally, this concept also uses the Yamamoto-Granger Causality test in the regression model. The regression result depicts that trade openness has positive effects on the economic growth in both the long run and the short run. Further, it there is a real a positive relationship between the openness of trade and formation of capital in promoting economic growth. Evidently, the openness of trade promotes economic growth but some studies support both negative and positive impact. A study carried in out for Brazil (a developing economy) and Canada (a developed economy) reveal that there is a positive and complementary relationship between capital formations promoting economic growth and trade openness (Ahmed, 2013). The result can be useful in analysing trade policies and economic growth in another developed and developing nations. Further, the study also confirmed that economic growth is stimulated by trade openness. Moreover, it has shown that in the long run, trade openness can enhance e economic growth by easing access to goods and services thus achieving efficiency in resource allocation and also by improving total factor productivity through knowledge dissemination and technology diffusion. Therefore, it’s expected that countries that embrace trade openness are bound to outperform those with less open policies. From this angle, developing countries have much to gain from trading with technologically advanced countries.

The international community and donors recommend trade liberalization policies to developing economies in a bid of to opening them and integrating them into the global market. The policies are driven by the failure of the import substitution strategy. Findings from empirical studies that depict a more outward and progressive economies record higher economic growth rates. The spectacular economic growth of developed economies such as USA and Canada can be partially attributed to their early trade openness. Surprisingly in the early 1900s, many developed economies have had adopted trade liberalization policies such as reduction of import and export tariffs and also introduced non-tariff barriers (Anyanwu, 2014). On the contrary, another school of thought argue ss that trade openness may be detrimental to the economic growth of the country by increasing the rate of inflation and by lowering exchange rates (Belloumi, 2013). Further, trade openness may bring negative impacts to the economy for developing countries which specializes in low-quality export products. For instanceexample, a county exporting primary consumer products are vulnerable to trade shocks. Comment by Econ16: Reduced?

Despite this, the general belief is that international trade is beneficial to economic growth and development. Besides, the trade policies such as the real effective exchange rate and the tariff rate affect the county economic performance through trade. In a more recent work, the instrumental variable approach depicts adds evidence that trade openness a increases economic growth in both long run and the short run since the investment ratio has a positive impact on the economy is a short run. Comment by Econ16: Those aren’t policies. Rewrite. Comment by Econ16: Doesn’t follow.

Significant growth rates are associated with countries embracing ongoing globalization and the increasing openness to international trade. In a study of four developed economies and developing economies, the reportresearch shows a positive correlation between trade openness and economic growth. However, below the threshold level, trade may have detrimental effects on economic growth as witnessed in Brazil (a developing economy). Panayotou (2016) finds no causal relationship between economic growth and exports in Brazil in his case studies. Trade openness was the primary source of growth in many developing economies in East Asia such as China and Singapore (Hsiao & Hsiao, 2006). It is certain that international trade facilities facilitates technological developments. According to the theory of comparative advantage, a country wants willto trade with another country in which it has the comparative advantage on. A country specializes in a sector that it has better factor endowments and produces goods on a large scale. Therefore, a productivity and export of this sector go up thus boosting overall economic growth. Comment by Econ16: Cite here Comment by Econ16: That’s not quite the theory – the theory only tells us which goods will be exported.

The comparative advantage theory has been advanced by another economist such ASA. Kruger who stipulates that trade liberalization is the main driver of liberalization in sectors for a country exhibiting economies of scale thus contributing to the efficiency in production and efficiency in the long run. Trade liberalization increases a country’s level of competitiveness and efficient production of domestic sector. Rodan, G. (2016) argues that trade liberalization benefits the economy through efficient resource allocation inherent to social marginal costs and benefits thus opening access to better technology and production inputs. Therefore developed and developing economies taking advantage of economies of scale thus providing favourable growth. The new endogenous growth modes postulate the positive relationships that exist between economic growth and openness’s a result of emission of new technologies. Developed countries with high degree of openness have thus the ability to use new technologies, therefore, allowing them to grow faster than countries with low level of technological advancements (Roller & Waverman, 2001). The cost of technology imitation also matters in the trade and growth relationship. Roller & Waverman (2001) further explains suggest that if the cost of imitation on innovation in poorer countries is lower in developing economies, then their economies will expand at a faster rate. Therefore, this study postulates that developing economies are poised to grow faster than technologically advanced economies. As pointed out above, some economists argue that openness to trade can be detrimental to economically challenged nations. The disparity occurs in countries where development and research are not core sectors. In addition, to that trade composition matters in a country’s growth effect. Moreover, the economic growth of a country matters ion the ease foreign technologies have been mastered and subsequent adoption in the local environment. Some studies confirm a negative impact of trade on levels of income. A study done in the Harvard school of business denotes. It can also be shown that lower income countries stand to benefit more than high-income countries (Roller & Waverman, 2001). However, when a consolidated approach is upheld, openness to trade embraces economic growth. Comment by Econ16: Cite? Comment by Econ16: redundant Comment by Econ16: rewrite Comment by Econ16: which model – cite. Comment by Econ16: Rewrite – makes no sense.

Malik & Awadallah (2013) used the instrumental threshold instrumentation to establish whether trade- income relationship varies with economic development. The study depicts This suggests that there exists a long relationship between trade and economic growth. In addition, the study depicts that trade and economic growth are co-related, but their relationship is fortified by the stability in macroeconomic policies. From the analysis, negative macroeconomic variables such as inflation can constrain economic growth. Developed economies have embraced openness to trade which plays a crucial role in economic growth. Empirical results depict infer that openness to trade has positive effects on the accumulation of capital, financial development and economic growth in the developed economies. On the contrary, the effect is negative and substantial. Trade openness has had a positive impact on the economic growth of developed economies but it exhibits negative effects on developing an economy (Zecchini, 2013). In addition, the real effect of trade depends on the level of inflation and also the level of financial development. Kim postulates evidence that trade promotes economic growth and development in low inflation, non-agricultural and high-income countries. Trade openness also enhances the stock market efficiency. Zecchini (2013) further explains argues that economic development is dependent on the performance and development of the stock market. Trade is enhanced when the country reaches the threshold of development of in the stock market, thus both in the short and in the long run, openness to trade increases a county economic growth. Openness of to trade does not entirely relate to volumes of trade, rather it relates to the policies instituted such as real effective exchange rate and the with tariff rate. Comment by Econ16: I have no idea what you’re talking about. Comment by Econ16: I’m not sure what you mean. Comment by Econ16: Seems at odds with the prior sentence. Soemthing might be missing. Comment by Econ16: cite Comment by Econ16: not a policy.

TRADE VOLUMES OR TRADE POLICIES

Although a country may increase its trade volumes in the international trade, policies are significant in enhancing trade openness. Economist Economic theorist theory confirms that trade liberalization has the a positive impact on the economic growth. Some developed and developing economies have identified a positive relationship between economic growth and trade openness while other countries have not. The disparity between the trade policies adopted by either side. When performing an analysis of trade policy on economic growth, there is a profound difference regarding policy conclusions for either party. The eEmpirical studies have s depicted considereda whether a trade policy is viable and if it is significantly good for economic growth (Panayotou, 2016). According to the protectionist economists, there does not exist no necessarya relationship between trade and economic growth. However the expansionist adopt trade policies, including policies towards the FDI, technological imports and economic growth and development. According to the liberalists, economic growth is brought about by the accumulation of resources (human and physical resources), improvements in technology, investments in efficient public infrastructure and innovation of new series and products all brought about by international trade (Snieska & Simkunaite, 2009). Comment by Econ16: Not a sentence. Comment by Econ16: I don’t know what you mean. Comment by Econ16: Not a sentence. I tried to correct it, but it still doesn’t work.

Openness and investment are necessary for spurring growth. In the neoclassical economic model, trade barriers have little or no effect on the economy although they are poised to reduce levels of available incomes. Trade barriers are known to exhibit dead weight losses; For instance, a protectionist economy might have a lower per capita GNP while a liberal economy has a higher per capita GNP but both grow at the same rate with identical innovation rate with respect to resource accumulation rates. Therefore Most economists believes that open economies grow faster than closed economies since open economies exhibit progressive trade policies that produce growth. Comment by Econ16: I’m not sure this is true. Brazil’s “Miracle” occurred during ISI, which was highly closed to trade. Comment by Econ16: Might be true, but is not connected to prior sentence.

There is a general statement referred to as the infant industry hypothesis argument advanced by the protectionists. The theory states that infant industries must be protected from foreign imports as an incentive to invest capital and learn to produce goods a more effectively and efficiently. In addition, the infant industries are protected so as to scale create large-scale production, enjoy economies of scale and develop innovative products that can be exported. Virtually all developed and developed economies have afound merit of in embracing the g protectionist idea, but on the other hand, it may be detrimental al since it locks away the competition and also prevents technology emission.

Developing economies have moved up away from the protectionist ideas and embraced the import substitution policies (ISI). The logic behind ISI is that the government directs all its resources into manufacturing. This The logic behind ISI is that the government directs all its resources into manufacturing.is because developing countries have high population rates and an abundant supply of labour thus the comparative advantage the counties exit include directing all resources into manufacturing (Anyanwu, 2014). Costs of new technologies thus forcing industrialization through the policies. Comment by Econ16: This is a protectionist idea, so this sentence makes no sense. Comment by Econ16: Rewrite the entire paragraph. It is not true, and I’m not sure what you’re saying. Comment by Econ16: ISI might involve government, but not always, and the statement is incorrect.

In order to spur economic growth, developing economies should push through ISI policies as discussed below. First, there are escalating tariffs in many economies. The tariff rates should change or rise with each stage of processing. Therefore, theThis means low tariffs on basic and primary goods, medium tarries imposed on the industrial inputs and equipment and high tariffs on consumer goods such as food products, cosmetics, clothing, and automobiles (Blanchard & Leigh, 2013). Such high tariff structures should encompass high effective rates for protection for final goods and products, meaning that the basic consumer good are protected against high prices thus the general public can afford thus spurring growth. In addition, the ISI policies should encompass considerable high taxes on the production of primary commodities as a way of pushing labour outside of the countryside and bring them to the cities for the growth of the manufacturing industry. Such tariffsThis includes taxes of on farm inputs such as imported fertilizers, and export taxes on farm goods. . In addition, tThe government working through ISI should fix the exchange rate at the high levels by overvaluing the domestic currency thus discouraging primary exports thus and reducing pieces prices of imported inputs used in the manufacturing sector. Comment by Econ16: Now I’m really confused. Are you laying down a pro-protectionist argument? Are you arguing against trade openness? Comment by Econ16: That’s now how this works – high tariff rates result in high final prices.

For lLiberalist’s economists, they assume that countries grow faster if they are open to international competition. They value prefer properly valued rates of exchange thus so the exchange rates does not discriminate against exports or imports. This is achieved by adherent flexible exchange rates that are allowed to move gradually to account for different inflation differences between the major export markets. In addition, they prefer removing taxes on export production. Rather than relying on infant protection of local industries, the developed economies should prefer export promotion in manufacturing and the high-tech sector by introducing rebates on imputed imported industrial products.

Relation between FDI and Economic Growth

Nearly all researchers believe that FDI (or Foreign Direct Investment) directly boosts the economy of the host country. The primary mechanisms for such external facilities are the importation/adoption of foreign know-how and technology, which the host country gets via licensing partnerships, employee training, emergence of new processes, imitation, new products by the foreign organizations; and the establishment of links between the local/domestic and foreign firms. These benefits, coupled with the direct financing of the capital it generates, implicate suggest that Foreign Domestic Investment can directly contribute to modernizing the economy of the host nation and fostering its development (Alfaro, et al., 2006). However, it is worth noting that the empirical marker of the existence of such externalities of positive productivity appears to be sobering.

In a study to establish the relationship between foreign direct investment and economic growth from 1994 to 2012, Almfraji & Almsafir (2014) held that, in theory, FDI directly impacts economic growth through accumulation of capital, and the deployment of new technologies and foreign inputs in the production processes of the host nation. Empirically, endogenous and neoclassical models of growth have been extensively used to test the theoretical benefits that come with the FDI. Although most results lean towards a positive relationship between these two economic parameters, others do not conform to that reality. The reasons include the selected techniques of estimation (such as OLS, Error correction, Cointegration, and Granger Causality models); sample selection (such as developed [G7-countries] versus less developed [BRICS] countries), and the selected timescale against the methodology of estimation (time series against cross- section) (Almfraji & Almsafir, 2014, p. 208). Comment by Econ16: Which 2?

According to Almfraji & Almsafir (2014), the interaction between FDI and human capital has been a topic for research, as shown by many studies on it. In their evaluation conducted on 69 less-developed nations between 1970 and 1989 using a cross-country regression framework for cross-country, they found that inward foreign direct investment has positive impacts on economic growth through interacting with human capital. They also found that the FDI provided more benefits to economic growth than domestic investment, yet and it increased domestic investment. According to these scholars,They suggested the equations of economic growth are extremely sensitive/prone to human capital proxies. Following their review ofFor a panel framework of data for 18 countries from Latin American from 1970 to 1999, they found a positive impact from FDI is only achieved when the host country its economy, liberalized capital markets, and human capital had attained a sufficient level of stability. In another analysis of a panel data for 84 nations for the same period, they found that FDI produces both direct and indirect impacts on economic growth if it interacts with human capital (Almfraji & Almsafir, 2014, p. 209). Comment by Econ16: Useless sentence. Integrate a small part of it to the next sentence.

FDI and Economic Growth in G7 Countries

In an extensive review of global FDI, Moloney & Octaviani (2016) stated that FDI flows have undergone phenomenal growth over the past 25 years in both breadth and size. On the a global scale, annual FDI increased by nearly 500% for the 1990-2014 period, if measured at the current prices in US dollars. This figure translates to an average annual 7.8% growth rate, which is above half-gain higher than the average global GDP growth rate (5%) through the same period. This long-running trend of FDI growth has also overshadowed economic growth for the world’s developed nations in general, although the margin between these parameters are smaller, standing at 4.4% and 3.9%, respectively (Moloney & Octaviani, 2016, p. 5). Below are figures demonstrating FDI growth over the past 25 years and FDI development in two-way international trade flows: Comment by Econ16: Current prices means not corrected for inflation – so if inflation was 2-3%, FDI’s growth was less than GDP growth. You should check this.

Comment by Econ16: Are these directly taken from another source? You have several graphics here that this may apply to – when using graphics from another source, you should find the data and build them on your own, integrating them into your output with the same fonts, etc. You still cite the source.

Figure 1: Global FDI Growth in a 25-year Period

Comment by Econ16: Appears taken from source directly.

Figure 2: Global value chains v Two-way trade flows

The following is a review of the link between FDI and economic growth in the G7 Countriescountries. The relative performance of Canada in attracting FDI inflows proves to have exceeded its overall standard economic weight on the global scale. The evidence for this argument is the fact that the UN World Investment Report has ranked Canada as the world’s 4th to 7th top destination for FDI since 2000, while its GDP has lied been between the 8th and 11th highest performing economy over the same period (Moloney & Octaviani, 2016, p. 14). Below is a figure of Canada’s FDI inflows ranking:

Comment by Econ16: Appears taken from source directly.

Figure 3: Canada as a top-tier FDI flows Destination

Canada’s international FDI share is also larger than that of its GDP. The following is a figure showing the country’s global FDI share in comparison to its GDP share: Comment by Econ16: I’m concerned about this argument, as it does not indicate net flows, only inflows. Shouldn’t we be more interested in net flows?

Comment by Econ16: Appears taken from source directly.

Figure 4: Canada's Global FDI share (Moloney & Octaviani, 2016)

In a research to investigate the relationship between FDI and economic growth in the European nations (EU-28), Simionescu (2016) stated that FDI produces both positive and negative impacts on the economy of the host nation. Using both Bayesian techniques and Panel data approach, he found that France is one of the 18 European nations where FDI produces a positive influence on the economic growth and the GDP rates positively impact FDI. He also added that FDI flows are integral to the consolidation of the Single Market in the European Union. He also projected that investments from the other countries across the world in the European Union would improve Europe’s caliber in the global markets as well as enable it enjoy the influx of foreign technologies (Simionescu, 2016, p. 201). Comment by Econ16: A bi-directional argument?

In the case of the United Kingdom, the LSE Growth Commission Report (2017) stated that openness to foreign trade and international talent underwent several changes, particularly during the 1980s and 1990s. In Particularparticular, the country eased the restrictions on both foreign direct investment during the 1980s and on migration towards the end of 1990s. In another study by Banks et al. (2016), the researchers found that the share of the assets of FDI owned by the UK held in the European Union have dropped from year to year since 2001. The return rates on direct investments in both the EU and other countries across the world have also undergone similar experience over the same period. On the contrary, the stock value of foreign investment in the UK has been on the rise for all the foreign regions, including the EU which has also enjoyed a surge in the rate of return rates on their FDI assets in the UK (Banks, et al., 2016). Comment by Econ16: So?

While FDI inflows through cross-border M&A could increase productive investments, several deals that the several countries stroke struck in 2015 were underlined by corporate reconfigurations and tax inversions. Often such reconfigurations require large movements in balancing payments but contribute little to no change in the MNE operations. This trend proved especially apparent in both the US and UK, alongside other European countries. It was also noticeable in several developing countries (UNCTAD, 2016, p. 3). FDI flows to Europe and North America recorded large leaps in the same year. In North America the surge in foreign investment, which registered a 160% rise to $429 billion, was steered by over 250% growth in FDI flows to the US. Although comparing the 2015 value to that of 2014 would prove skewed due to the low levels of global FDI flows that year (2014), the $380 billion that the country generated from FDI inflows in 2015 represent the highest value since the turn of the millennium (2000) (UNCTAD, 2016, p. 4). Comment by Econ16: Mergers and Acquisitions? Comment by Econ16: Multinational?

Comment by Econ16: Again, this looks taken directly form source, so the fonts, etc do not match up with the text. Find the data and generate the graphic on your own.

Figure 5: Regional FDI Inflows 2013-2015 ($billion) (UNCTAD, 2016)

With $13.4 trillion in FDI stock in 2015, the TTIP (Transatlantic Trade and Investment Partnership) initiative, Germany takes the second spot in the list of the G20 largest holders of FDI in 2015. It also received 46% of the global FDI flows even though the group generated just a smaller proportion of the world GDP. From a broad perspective, FDI flows to G20 countries grew by 106% in 2015 to about $819 billion, partly due to a huge increase in inflows to the US and selected European Union nations such as Netherlands, Belgium, Ireland, France, and Germany) (UNCTAD, 2016, p. 9). Below is a chart of theFigure 6 below shows FDI flows in group nations: Comment by Econ16: I don’t know what this means. Comment by Econ16: Is this just inflows again? What about net?

Comment by Econ16: Appears taken from source directly.

Figure 6: FDI Inflows for selected mega groups in 2014-15 ($Billion and %) (UNCTAD, 2016)

In the 2009-2014 period, Italy was ranked the world’s sixth best investor economy by FDI stock. In 2009, the country had $10 billion FDI stock, during which it was only two spots ahead of two nations (Germany and China) in the top ten list. However, Italy used the next 5 years to make a hefty 90% of the 2009 FDI stock which made it move up to number 6 in 2014, with $19 billion in FDI stock. Below is a chart showing the world’s top ten investors as of 2015. Comment by Econ16: I’m very confused by the phrasing here. Can you say it some other way?

Comment by Econ16: Appears taken from source directly.

Figure 7: Top 10 Investors by FDI stock from 2009 to 2014 ($ Billion) (UNCTAD, 2016)

Despite the economic constraints that troubled East Asia in 2015, Japan remained one of the top investing countries in the world. ; iIt became second only to the United States only. Below is a chart showingFigure 8 shows Japan’s rank in the top investing nations worldwide: Comment by Econ16: You’ve switched to outflows. This needs to be clarified, and its meaning should be explored.

Comment by Econ16: Appears taken from source directly.

Figure 8: World’s Top 5 Home Economy FDI Outflows (UNCTAD, 2016)

FDI in BRICS Countries

Foreign direct investment (FDI) inflows in Brazil are sizeable, but did not fully cover the account deficits of 2014. In addition to that, the composition of the country’s FDI inflows has transformed. In particular, the country’s portion of loans to affiliated firms, which the IMF considered as FDI, substantially rose in 2014. This advancement, which is also commonplace in many developing market economies, has led to Brazil taking a cautious approach in some issues of economic growth, because such loans are less stable than equity FDI, and contribute to the vulnerability of the economy to external shocks (OECD , 2015). Below is a chartFigure 9 shows Brazil’sing the countries advances in widening its external imbalances: Comment by Econ16: Current?

Figure 9: Widening of External imbalances (Brazil) Comment by Econ16: Appears taken from source directly.

From 1995 to 2002, FDI operations in Russia were less developed, falling short of the foreign investments in Poland, the CEE region’s largest recipient nation, the Czech Republic, and Hungary. However, the country significantly improved this sluggish trend after 2003. As a result, the average value of foreign direct investment inflows in Russia between 2003 and 2011 stood at $16.2 billion per year. This figure was $12.5 billion higher than the country’s yearly average of $3.7 billion generated from 1995 to 2002. This measures increased the country’s cumulative direct investment between 2003 and 2011 to $145.9 billion - 5.7 times higher than what it generated in eight years to that period. It is suchThese drastic dramatic changes that point to a significant advancement of foreign capital in the economy of Russia (Iwasaki & Suganuma, 2014, p. 4). Comment by Econ16: The measure was responsible for the increase? I doubt that.

India and China are the largest emerging Asian economies that also readily in open up more industries to foreign investment. In 2015, India established the following liberalization measures to improve both FDI inflows and outflows:

· Raising the FDI (Foreign Direct Investment) cap from 26% to 49% in both pension funds and insurance sector Comment by Econ16: I don’t think bullet points are appropriate here. Write this out as sentences in paragraph form.

· Permitting FDI flows up to 100% under the automatic manufacturing of healthcare facilities and medical devices

· Boosting the thresholds of FDI inflow projects that need upfront approval and worth $306.3 million to $765.8 million

· Removing the sub-ceilings that bar the development of foreign investments such as FDI, non-resident Indians’ investments, venture capital, and portfolio

· Allowing partly paid warrants and shares as eligible capital tools to enhance the establishment of India’s FDI policy

Moreover, India also introduced a robust strategy for FDI liberalization and relaxed FDI regulations in about 15 “major production sectors”, including civil aviation, defense, manufacturing, construction, mining, and agriculture (UNCTAD, 2016, p. 91).

Just like India, China also several changes to its FDI operations. For example, it allowed foreign firms to start up bank card clearing firms and reduced several restrictions on foreign ventures in the country’s real estate market. China also permitted ownership of e-commerce businesses by foreigners and used Beijing for a pilot project of starting up some service sectors. Moreover, the country also revised the Catalogue for the Guidance of Foreign Investment Industries, in which it stipulates the industries in which it can “encourage”, “restrict” or “prohibit” foreign investment. Unlike the old version, the current Catalogue slices the number of restrictions on investment, particularly in the country’s manufacturing sector (UNCTAD, 2016, p. 90). Comment by Econ16: Maybe “regulations” is a better word here.

In a study to determine the link between FDI and economic growth, Awolusi & Adeyeye (2016) invested in various African countries in at random. They found that a 1% percent growth in FDI would bring a 0.12% surge in South Africa’s GDP. In addition to that, South Africa is one of the four African nations (the others three include Kenya, Nigeria and Togo) with FDI operations (outflows) in more than two foreign countries (Awolusi, et al., 2017, p. 289). According to their GMM and OLS estimation, the correlation coefficient for South Africa was 0.67, implying a positive link between FDI and economic growth. However, they stated that their findings show that FDI’s contribution to South Africa’ economic growth, although significant, is minimal (Awolusi, et al., 2017, p. 293). Comment by Econ16: I’m confused by the concept. Comment by Econ16: On the outflow side? I’m a bit lost in this paragraph.

Trends and Patterns of FDI Flow

One of the world’s striking developments in the past twenty years is the remarkable growth of foreign direct investment on the global economic front. Some of factors that have contributed to the globalization of the world economy include trade liberalization, breaking of trade barriers, capital markets, technological advancements, and the increasing internationalization of ideas, goods, or and services, over the same period. This paper willWe now examine the trends and patterns of FDI flow in two periods: pre-1990s and post0-1990s.

Trends and Patterns of FDI Flow: Pre-1990s

By 1880, Singer Sewing Machine became the first modern MNCs in world and was considered one of the world’s largest firms. It established many manufacturing plants around the world which prompted other firms to follow the suit, and by 1914 about 37 US companies had stationed their production facilities in at least two overseas locations. By 1913 the net worth of global foreign long-term investment had increased to $44 billion from $4 billion in 1864. The UK topped the list of creditor countries, accounting for nearly three-quarters of the total value of international capital growth up to 1900. Thereafter, the United States and Continental Europe ripped off the lenders list as its share in new investments dipped. At the same time, Germany and France, the two other heavy investors from Europe owned foreign assets worth $5.8 and $9 billion, respectively; while the US accounted for credits worth $3.5 billion. Comment by Econ16: Use a different phrasing – this means “stole”.

After the WWI, the industrial distribution process around the world sped up, with the War war reshaping the pattern of international transfer of capital and heralded the period made significant impacts on the overall landscape of global capital movement. Technological advancement in the communication and transport sectors as well as the fact that European nations and Japan needed capital from the US to fund reconstruction of the damages inflicted by the WWI, reversed the trend towards of FDI growth. In 1970s, the world underwent rapid growth of several large industrial units which led to extensive international ramifications. Although a significant number of the MNCs had been operational for several years, their growth took shape during this period, in which they expanded both in size and global scope of their activities. At the same time, the net worth of the global FDI inflows grew to $43,440 from $12,586 million, while the portion of developed countries rose to FDI inflow of $32,826 to $9,812 million. Comment by Econ16: This makes me think you meant WWII, did you? Comment by Econ16: Rephrase – this doesn’t work.

The 1980s saw significant advancements in global economies as companies from many countries expanded their global operations. With surges in both financial institutions and integration of markets, they introduced a unique wave of foreign direct investment. With Tthe world economy registering registered a strong recovery from the early 1980s recession, and the ensuing high rates of growth in both developing and developed countries, the global FDI flows increased faster than domestic investment and output. In the second phase of the 1980s, the tally of developed countries, which later became remarkable outward investors, surged with Japan emerging as one of the top outward investors. The increase in the number of cross-border M & As, spurred by the competitive and technological forces, also played an integral role in the growth of foreign direct investment around the world.

Total global FDI inflows increased to $200 billion by 1989 from the $61 billion it recorded between 1982 and 1986. At the same time, FDI inflows to developing countries increased at an annual growth rate of 22% from $19 billion in the first phase of 1980s to about $29 billion by 1989. The share of the developed countries increased at an annual growth rate of 24% from $43 billion during the 1982-1986 period to about $172 billion by 1989. The top five creditor countries also became the largest recipients, claiming 57% of the world FDI inflows during 1980s. Their outflows also grew by 38% annually to hit $202 billion by 1989. From 1980 to 1989, the US, UK, and Japan became the world’s largest creditor nations. Below is a table of the FDI inflows and outflows that took place between 1982 and 1994: Comment by Econ16: Rewrite – there’s a conflict between share and growth rate.

Year Comment by Econ16: Table is interesting, but is confusing in that the totals for all countries don’t equal. Shouldn’t inflows = outflows for the planet as a whole?	Developed Nations	Developing Nations	All Countries
	Inflows	Outflows	Inflows	Outflows	Inflows	Outflows
1982-1986	$ 43b	$ 53b	$ 19b	$ 4b	$ 61b	$ 57b
1989	$ 172b	$ 202b	$ 29b	$ 15b	$ 200b	$ 218b
1990	$ 176b	$ 226b	$ 35b	$ 17b	$ 211b	$ 243b
1991	$ 115b	$ 188b	$ 41b	$ 11b	$ 158b	$ 199b
1992	$ 111b	$ 171b	$ 55b	$ 19b	$ 170b	$ 191b
1993	$ 129b	$ 193b	$ 73b	$ 29b	$ 208b	$ 222b
1994	$ 135b	$ 189b	$ 84b	$ 33b	$ 226b	$ 222b

Table 1: FDI Inflows and Outflows from 1982 to 1994 Comment by Econ16: Source?

Trends and Patterns of FDI Flow: Pre-1990s

International FDI flows, which rose in the second half of the 1980s, as a result of countries adopting FDI continued to increase systematically during the 1990s. In general, FDI surged by about 22% in the early stages of 1990s and by nearly 40% towards the end, faster than the other aggregates of the global economy, including trade, world production, and capital formation. Some of the factors that spurred global FDI flows to the higher levels (growing from about $225 million between 1990 and 1995 to a world record of about $1.5 trillion by the turn of the millennium) were global economic growth and the MNCs’ response to technological advancements, international competition and trade liberalization. As a result, global inward FDI flows as a representation of GFCF grew from 4.1% during the 1990-95 period to 22% by the turn of the millennium, while the GDP also increased from 8.9% to 20% between 1990 and 2000. In addition to that, the industrial nations accounted for a large percentage of the growth in FDI flows, with their contribution to the world FDI rising from $145 billion during the 1990-1995 period to $1 trillion by 2000. Comment by Econ16: Rephrase – this doesn’t mean anything. Comment by Econ16: Billion? Comment by Econ16: Ratio?

Inward FDI flows to the developed nations rose from 3.6% to 25% between the 1990-95 to 2000, and from 8.1% to 17.1% between 1990 and 2000, as percentages of GFCF and GDP, respectively. Within the developed countries, the portion of the Triad (Japan, the United States, and the European Union) in total global FDI inflow and stocks rose, and fell within the 60-70% range. The European Union in FDI inflows into the Triad accounted for 40.3% in 1990, but it grew by 5.7% within the next decade to hit 46% by 2000. The US remained the top FDI recipient nation in the world as inflows hit $300 billion by 2000 against $40 billion that it accumulated in the early stages of the 1990s. Inflows to Japan rose moderately, and the total FDI inflows grew from $1 billion between 1990 and 1995 to about $8.3 billion by 2000.

During 1990s, the tally of developing countries receiving a significant amount of inflows faced a huge surge and FDI was viewed as the largest provider of foreign capital for most of them. At the same time, their portion in global FDI inflows increased from 17.5% to 21.7% from 1990 to 2000, and from $74 billion to a record value of $237 billion between the 1990-1995 period and 2000. Inward FDI flows rose from 5.7% to 13.4% and from 13% to 30.9% between 1990 and 2000, as percentages of GFCF and GDP, respectively. The boom in the over investment flows to developing nations reflected the sustained growth of the world economy and increasing privatization and trade liberalization in these countries. The growing integration of the developing world into the MNCs’ investment plans also contributed to the surge. Comment by Econ16: This seems self-evident – what other forms of foreign capital is there? Comment by Econ16: Over? You mean too much?

The increase of FDI flows to developing countries was were not evenly distributed among groups and regions, with most inflows concentrated in about 15 host nations from Asia and Latin America. FDI flows into the Caribbean and Latin America contributed about $22 billion in the early stages of 1990s and grew by threefold in the second phase to reach $95 billion by 2000. For example, FDI inflows to developing Asia increased from $ 47 billion to a record value of $133 billion between the 1990-1995 period and 2000. The rise in the investment flows to these regions emanated from the strengthening of the positions of some developing countries in them, the introduction of regional corporations and the readiness of nearly all countries in the region to welcome FDI and upgrading their trade policies.

Infrastructure and Economic Development

Trends in Infrastructure Investment

Within eight years after the 2008 Global Financial Crisis (recession), investment funds has generated over US$200bn to direct long-term capital into various infrastructure investments. Studies estimate that organizations have allocated nearly the same amount to boost infrastructure. They seek to make direct investments rather than do it through investment funds. Typically, these organizations are likely to focus on sovereign wealth, major pension, and insurance funds; all of whom are in dire need for long-term investments. The creation of specialist equipment and teams for investment, has resulted in a steady rise in both the value and volume of infrastructure transactions in the past ten years. It has also led to a significant surge in asset valuations, as the acquirers have tolerated lower yields on their investments. InfraDeals (2016) estimates that the world has more than $110 billion worth of dry powder to deploy globally from unused equity funds (10). Comment by Econ16: Cite? Comment by Econ16: Who are they? Comment by Econ16: Perhaps this isn’t what you want here – deleting it changes the sentence, but identifies the source as well. Comment by Econ16: I don’t know what this is.

Comment by Econ16: Appears taken from source directly.

Figure 10: International Unlisted Infrastructure fundraising

Figure 11: International Infrastructure transaction activity

Comment by Econ16: Appears taken from source directly.

Figure 12: Global Infra investment - Equity and PPP by the type of owner

One of the common charges associated with the private sector investments is that they focus on generating profits, which can only be attained through reduced cost of maintaining assets and detriment of customer service. The vast majority of evidence in this case appears to lean towards the opposite – that is, the private investors in infrastructure typically improves consumer services through the following measures. : Firstfirst, the private sector focuses on the need to compete (for the non-monopolistic infrastructures such as airports and seaports), which brings a shift in the strategy used to ensure customer satisfaction. Second, it could can also use regulators to set price constraints and efficiency targets. In essence, regulators appear more suitable to the privately-owned companies than the public-owned one. Comment by Econ16: This isn’t the right word – I’m not sure how to correct it. Comment by Econ16: Again, not the right word.

For example, the regulator of the water sectors in Wales and England (Ofwat), was able to slice bills in actual terms by an overwhelming 5%, despite continued advancements in target service standards. According to Ofwat, organizations are set to invest over £44bn (or nearly £2,000 per household) by 2020 which will benefit customers from substantial improvements. The move by Ofwat has only been possible because the (private) investors have the desire to spend significant volumes of capital into the water industry to seek increasingly modest yields. PwC’s analysis of funds generated since 2004 presents a downward trend in the return expectations from 14% to 10.6% in 2004 and 2016, respectively. Studies show that many regulators take advantage of the (private) investors’ desire to invest capital in infrastructure, by accepting ever-lower yields in all regulatory reviews in the last ten years. Comment by Econ16: Just doesn’t make sense. Comment by Econ16: Reduce? Comment by Econ16: 5% does not seem “overwhelming.” Comment by Econ16: I still can’t figure this out.

In 2016, a study by PwC Australia on the impacts of privatization on the country’s electricity market showed that, on the costs-per-customers basis, private owners of electricity distribution plants in Australia ran their assets at range of 15% -33% cheaper than the publicly-run ones. Further, their research also highlighted the 2014 analysis conducted by the NSW Treasury which demonstrated that electricity bills in South Australia and Victoria (places where nearly all electricity networks belong to the private sector) rose at a slower rate than in Queensland and NSW (where most networks are in the hands of the public).

Comment by Econ16: Appears taken from source directly.

Figure 13: Average targeted fund returns raised globally

Figure 14: Historical growth of regulated WACC (Weighted Average Cost of Capital)

Figure 15: Total cost per customer versus customer density between 2009 and 2013

Trends in Infrastructure Investment in G7 Countries

Currently, the world faces a growing need for governmental organizations to fund, maintain, upstage, develop, and expand infrastructures essential to ensuring sustained growth of economic productivity and activity. Nearly $45 trillion is required to modernize and upgrade water, transportation systems and electricity in the U.S., Western Europe, and Canada over the next one and a half decades 5. With governments increasingly hard-pressed to raise the capital needed to maintain and upgrade their infrastructure, most nations now recognize that the private sector can help them generate capital to meet these infrastructure requirements, allowing them to align the available limited resources toward handling some vital functions in their plans. Such trends present significant opportunities for investors to obtain and maintain high-quality assets across the globe. Comment by Econ16: ?

Most investors view infrastructure as an attractive investment due to the fact that these assets provide portfolio diversification as well as allow the investors to have stable cash returns 6. In the current global markets, the demand for both core and private infrastructure appears particularly strong due to these investments striving to offer long-term access to inflation protected, stable, and economically insensitive cash flows. In addition to that, they also have the potential to gain low volatility, consistent development of cash flows, and yields that are less correlated with other classes of asset. Below is a chartfigure (number) summarizing both the benefits and risks that come with infrastructure investment: Comment by Econ16: I’ve been taking these numbers out, but now I’m wondering if they are endnotes or footnotes, though I don’t see any in this document.

Comment by Econ16: Appears taken from source directly.

United States

Below is a chartfigure (number) illustrating the yields and returns, are based on the historical data and investment expectations in the United States. Since the market environment undergoes several changes from time to time, as well as the increasing allocations to infrastructures by various institutional investors, the return expectations from these investments are also subject to changes.

Comment by Econ16: Appears taken from source directly.

The chartFigure (number) below shows the a steady increase in consumption of electricity in the United States since 1974. The usage is not dependent on price of electricity or economic environment. The projected price elasticity for residential consumption of electricity is –0.05 (meaning that a 20% rise in price results to a 1% fall in consumption).

Comment by Econ16: Appears taken from source directly.

The next chart figure (number) shows that the demand and consumption of natural gas is dependent on temperature changes; and not on the economy or the prices of the underlying commodities. The correlation coefficient between the monthly consumption of residential natural gas and heating degree days (HDD), which represents the proxy for cold weather, in the United States is 0.86, showing direct proportionality between these two parameters.

UK

Although there is little to no direct assessment of the impact of investment on infrastructure as a sector of the UK Government, one can review specific sectors where private investors tend to develop their ventures. In a research to study the role and effects of specialist investors in infrastructure within the UK, PwC analyzed the performance of the country’s energy distributors, sewerage and water companies, and airports, especially those that have experienced a pronounced change in ownership in the ten years ending in 2015. The highlights of the PwC analysis showed: Comment by Econ16: Cite the source here, drop “a research”

· A 13% decline in annual water leakage, which is equivalent to the total water consumption in Wales Comment by Econ16: It would be better to write this out than use a bullet point style.

· A 29% decline in interruptions of electricity supply and a 39% drop in the length of average outage

· A rise in the investment levels - In every year from 2004 to 2014, water companies and operators of electricity distribution networks made more per-customer investments than those generated in profits

In their review, PwC UK found that these improvements were attributed to several factors brought by the shifts in ownership. They included:

· Readiness to work in partnerships with regulators to ensure long-term benefits of consumers

· Establishing long-term perspectives on the assets through performance evaluation and value creation

· Focus on the existing infrastructure, rather than the ancillary commercial ventures

· Aligning management incentives with the long-term performance activities

Following its analysis, PwC concluded that the UK registered a notable rise in performance across all classes of major assets, which should be considered a “big” step due to the specialist investors’ focus and investment capital provision. An example of the PwC’s argument is the fact that an analysis of Thames Water’s performance after being acquired by Macquarie shows a 31% decline in leakages since 2006, beating the yearly targets set by regulators. Under the previous ownership, Thames Water had failed to meet all the targets set by the regulators. Another example includes the Affinity Water Company, which registered significant improvements in both cost efficiencies and customer engagement since the 2012 acquisition by Morgan Stanley and Prudential’s sector of infrastructure development (11). Below is a set of graphs showing major changes in UK’s infrastructure development: Comment by Econ16: A footnote/endnote? Where are they?

Comment by Econ16: Appears taken from source directly.

Figure 16: UK Electricity distribution - Average sumo of customer minutes lost (CML)

Figure 17: UK electricity distribution - Average sum of customer interruptions (CI)

Comment by Econ16: Appears taken from source directly.

Figure 18: Water and Wastewater in UK - Serviceability rating for the overall of water infrastructure

Figure 19: Water and Wastewater in UK - Overall leakage across England and Wales (MI/day)

Canada

Preqin’s Infrastructure Online is one of the Canada’s top analysts of the overall infrastructure investment in the country. The service have detailed profiles of more than 2,400 organizational infrastructure investors across the globe, 140 of which are based in Canada. According to a report by the Preqin Limited (2015), pension funds from both the private and public sectors, constitute half of the Canada-based infrastructure investors, indicating their prominence in the country. Insurance companies, asset managers, and endowment plans are also numerous; with each accounting for about 8% of infrastructure investment based in Canada. A third of assets under management are owned by these investors, and worth between $0.8 billion and $3.91 billion. Below is a set of graphs showing infrastructure investment in Canada:

Comment by Econ16: Appears taken from source directly.

Figure 20: Canada-Based Infrastructure Investment by Type

Figure 21: Canada-Based Infrastructure Investment by the Assets under Management

Figure 22: Infrastructure Investment by Source of Infrastructure Allocation - Canada-Based Investments vs. Other Investments

Figure 23: Preferred Route to Market of Canada-Based Infrastructure Investments

Trends in Infrastructure Investment in BRICS Countries

According to Garcia-Escribano et al. (2015), the infrastructure gap in Brazil is a reflection of the an extended period during which the country experienced low performance in infrastructure investment. In Brazil, infrastructure investment has faced a significant decline from about 5.2% of GDP to 2.25 % of GDP in the first half 1980s and over the past twenty years, respectively. It only registered a slight increase in 2013 when it reached to around 2.5% of GDP. Despite the lack of standardized or highly reliable infrastructure investment information - particularly one that allows cross-country comparison – several studies show that Brazil’s infrastructure investment, for more than one decade, has been dropping. For example, it has declined below the levels registered by fellow Latin America nations and other emerging market economies such as China, India and Chile. In addition to that, Brazil shows significant differences in the infrastructure investment levels across different sectors. For example, the telecommunication and electricity industries are the top bearers of the vast majority of infrastructure investments in Brazil. The two sectors are primarily driven by private sector under the management of the concessions scheme. On the contraryFor contrast, Chile has directed most of its investments towards road/transport networks and supply/distribution of water and sanitation. Below, figures 24 and 25, is a pair of graphs showing the trend of infrastructure investment in Brazil from 1981 to 2011: Comment by Econ16: I don’t know what this is.

Comment by Econ16: Appears taken from source directly.

Figure 24: Infrastructure Investment in Brazil

Figure 25: Infrastructure Investment in Latin America (In % of the GDP)

Infrastructure Investment Expenditures and Infrastructure Improvement Comment by Econ16: ?

From a broad perspective, infrastructure investment involves spending on new projects of transport construction and improving the existing networks. It is oOne of the key determinants of country’s performance and development of itsis its transport sector. Examples of inland infrastructure are maritime ports, roads, maritime ports, rail, airports, and inland waterways. Usually, they cover all the sources of financing. Several studies show that efficient transport infrastructure brings social and economic rewards and benefits to both the developing and developed economies through the following ways: Comment by Econ16: That’s not accurate – probably need to rephrase. Comment by Econ16: Rewrite.

· Improving market productivity and accessibility Comment by Econ16: Again, skip the bullet points – write this out in a paragraph.

· Ensuring balanced economic development across different regions

· Creating employment,

· Promoting labor mobility

· Connecting communities

In our model, tThe indicator of infrastructure investment growth is estimated as a portion of GDP for total inland investment for the inland waterways and sea, road, air, and rail components.

Developed Economies

UK Comment by Econ16: Wasn’t there a discussion of UK just a few pages back? Perhaps this should be integrated into that.

In the past twenty years, the UK Government has extensively utilized PFI contracts to foster private infrastructure investment in both social and economic projects. Since PFI contract reported reports are included in a register, indicating that the annual spending under the current PFI contracts is about £10 billion per year, they comprise nearly £6 billion in service charges and £4 billion in capital repayments, including interests. Although tougher PF2 contracts were introduced to enable the infrastructure investment route to stay open while also providing the maximum value for the taxpayers, PFI contracts steadily dried up between 2014 and 2015. In fact, Oonly £0.7 billion of the projects reached the full financial closure in the same period. ICAEW (2016) predicted that the low levels of new PFI contracts are not likely to undergo any significant changes sooner, given that even the future PFI projects in the current procurement are less than £1 billion. Below is a pair of the UK chart of performance in infrastructure investment and expenditures from 1990 to 2014:

Comment by Econ16: Appears taken from source directly. Also a table, not a figure.

Figure 26: PFI Register

Figure 27: PFI (Private Finance Initiative) Projects Comment by Econ16: Appears taken from source directly.

Just like otherLike other countries around the globe, the UK realizes that there is need for improving its infrastructure. In an article, Kable (2017) stated that the Government of the UK has set aside a hefty sum of £200 million to improve the country’s infrastructure. In particular, it will direct those funds to upgrading junctions, renovating roundabouts, and enhancing traffic signalling to slice diminish traffic congestion. With half of the budget allocated for fighting traffic issues, the UK Government also plans to cater for to other infrastructure needs. For example, the country has plans to upgrade two large projects designed to build a dual carriageway on the A69 sandwiched by Newcastle and Hexham. Comment by Econ16: That’s pretty small – certainly not “hefty.”

US Comment by Econ16: This was also covered a few pages back – perhaps it should be integrated in.

In the United States, nearly all spending on wastewater, drinking water, and transportation infrastructure is carried out by the public. In 2014, local, state and federal governments spend about $416bn on infrastructure investments (or . That figure was representation of about 2.4% of the GDP) (gross domestic product). For three decades, US infrastructure investments as a share of the GDP has undergone a steady and stable rise. In 2014, the biggest share of public infrastructure expenditure covered highways ($165 billion), with mass rail and transit , and water utilities trailing at a close range. Almost a quarter of the country’s total infrastructure investments expenditures (about $100 billion) was generated by the federal government; while the local and state governments produced a third of the sum (about $300bn). Of the expenditures by the federal government about two-thirds covered new, upgraded, or renovated structures and equipment. While the local and state governments contributed to the same infrastructure as the federal spending, a bigger share of their expenditures covered maintenance and operations of infrastructure.

Even for a country that is as developed as the United States, infrastructure improvement seems inevitable. In fact, the collapse of the Interstate 35W Bridge over Mississippi River that occurred in Minneapolis on August 3, 2007, is a testimony to the fact that even the US needs to upgrade its infrastructure. Following that incident, the then president, Obama, argued that the United States needs to build what he described as “21st Century infrastructure” (stronger bridges, modern ports, the fastest Internet, and faster trains). Golson (2015) stated that fixing America’s infrastructure should involve the following factors:

· Availing funds for highways Comment by Econ16: Write it out.

· Renovating falling bridges (such as the Interstate 35W Bridge)

· Constructing waterways

· Building ports, harbors, and dams

BRICS Economies

China Comment by Econ16: So you’ve covered Brazil above – maybe it belongs here.

Following thirty years of exceptional economic growth, China is seems to be moving towards a lower but steady and likely more sustainable path of economic development. In November 2013, China released the reform agenda (Third Plenum) designed to help the country promote innovation and strengthen market mechanisms. It also set up the Fourth Plenum to enhance the use of the law in fostering strategies for economic growth. From a broad perspective, one can point out the primary challenges China faces, as well as the measures designed to help counter these shortcomings and establish a sustainable economic growth (KMPG, 2009). Below is a set of strategies that the country aims at using to expand its infrastructure investments

· Currently, China can unwind the imbalances inflicting its economy, manage growth risks and avoid an abrupt slowdown to the economic development. Correction of prices in the country’s housing market could slice the vacancy rates by improving the affordability of housing. Unless the guarantees to the state-owned enterprises are phased out, restructuring the industries facing excess capacity is likely to fail. However, removing them enables all firms compete on a level ground with regards to public procurement, taxation, regulation, and finance. In addition to that, boosting market mechanisms would enhance allocation of capital resources for greener growth. Comment by Econ16: Really an inappropriate use of bullet points. Drop them and layout sentences. If this is a long quote, you must drop it, and rewrite it completely. If that’s the case for the prior bullet points, the same applies.

· The development of the service sector and urbanization ensures economic growth. Studies project that about 100 million rural dweller are likely to migrate to the Chinese cities by 2020, in which case the government has to extend the social security and public services to the 100 million migrants currently living in the cities and renovate the shanty-town houses for the estimated 100 million citizens to relocate to the urban centers. These moves boost the economy-wide productivity and growth. As from 2013, the service sector has produced the largest share of the GDP. Therefore, the country needs to open up more sectors to enhance private investment.

· Reforms of the training and education system, from early stages to adult learning, needs to expand to provide the relevant skill sets to all learners to meet the educational needs of a rapidly growing and changing economy. Promoting equal opportunities will help build the human capital needed for a knowledge-based economy.

· The land resources need reallocation within the agricultural sectors to improve both rural incomes and productivity. Moreover, moving towards off-farm employment needs facilitation to enable the social welfare systems to provide a broader coverage of the households in the rural areas.

· Rural land efficiency needs boosting to improve market-based pricing of fertilizer, water as well as upgraded farmers’ education.

Comment by Econ16: Appears taken from source directly.

South Africa

Below is a chartFigure 28, below, is the infrastructure investments that South Africa has undertaken from 1950, as well as the future projections to the years ending in 2020.

Figure 28: Government Infrastructure Investment (Vukeya, 2015) Comment by Econ16: Appears taken from source directly.

In the views of Vukeya (2015), infrastructure results in growth by reducing the cost of transactions, production, and consumption, thereby improving development outcomes and service provision. South Africa boasts better developed and modern infrastructure such as health facilities, roads, and educational institutions, among others designed in line with the same standards as in developed nations. However, the investments in infrastructure should not mask the fact that the country is poorly located and still faces a large infrastructure deficit. According to the reports by the National Treasury (2012), and the National Planning Commission (NPC) of South Africa (2014), the emerging economies requires infrastructure investment equivalent to 25% of their GDP to register a significant rise increase in economic growth. However, South Africa’s investment in infrastructure to GDP ratio is steps away from the prescribed standard. As of 2013, the country’s infrastructure investment to its GDP ratio was 19.3%, which –although it shows a 4.4% surge from the 14.9% of 2000 – is 5.7% shy off the prescribed 25%. If the it grows at the same rate it did between 2000 and 2013, then it will attain the prescribed level by 2030. In part, the critical infrastructure needs in South Africa emanated from the discriminatory practices that were commonplace in the apartheid government (Vukeya, 2015). However, some blames should also go to the underinvestment practices of the 1980s and 1990s and overcapacity in some parts of the country. Comment by Econ16: Really? Why is that? Comment by Econ16: ? Comment by Econ16: This needs explanation.

Methodology and data:

This study uses a panel data in which countries are the units of observation. The data for this research been drawn from UNCTAD, the, the World Bank, International Financial Statistics, and the IMF. All the variables are defined in real values. The data set covers the period from 1985 to 2015. In order to measure the impact of all these factors mentioned above. The panel model allows us to control for the country-specific effects arising from factors that cannot be directly measured. Therefore, we estimate the models by using generalized least squares that adjusts for heteroscedasticity across countries. Thus, the general specifications structural equation model used in this study are: Comment by Econ16: That’s not quite right – it’s a panel, so both countries and years are involved. Comment by Econ16: Not enough – clearly define this.

GDPpcgf (FDI, TRD, GCF, INF, POP) (1)

Where:

GDPpcg = GDP per capita growth (annual %)

FDI = Foreign Direct Investment (% of GDP)

TRD = Trade openness as (% of GDP)

GCF = Gross capital formation (% of GDP)

INF = Inflation, consumer prices (annual %)

POP = Population growth (annual %)

Data Description:

GDP per capita growth (annual %): Annual percentage growth rate of GDP per capita based on constant local currency. Aggregates are based on constant 2010 U.S. dollars. GDP per capita is gross domestic product divided by midyear population. GDP at purchaser's prices is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Comment by Econ16: There’s the definition of real – but it’s short – is this PPP dollars? International dollars? Etc – there’s a bunch of definitions here, you should be clear. Comment by Econ16: Then isn’t it NDP?

Gross capital formation (% of GDP): Gross capital formation (formerly gross domestic investment) consists of outlays on additions to the fixed assets of the economy plus net changes in the level of inventories. Fixed assets include land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; and the construction of roads, railways, and the like, including schools, offices, hospitals, private residential dwellings, and commercial and industrial buildings. Inventories are stocks of goods held by firms to meet temporary or unexpected fluctuations in production or sales, and work in progress." According to the 1993 SNA. Comment by Econ16: End quote, where’s the starting quote? Comment by Econ16: ?

Trade (% of GDP): Trade is the sum of exports and imports of goods and services measured as a share of gross domestic product.

Foreign direct investment (% of GDP): Foreign direct investment are the net inflows and the outflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. This series shows net flows in the reporting economy from foreign investors, and is divided by GDP.

Inflation, consumer prices (annual %): Inflation as measured by the consumer price index reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services that may be fixed or changed at specified intervals, such as yearly. The Laspeyres formula is generally used.

Population growth (annual %): Annual population growth rate for year t is the exponential rate of growth of midyear population from year t-1 to t, expressed as a percentage . Population is based on the de facto definition of population, which counts all residents regardless of legal status or citizenship.

Institutions indicators used as interaction terms in the estimations:

Control of Corruption: Control of Corruption captures perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests. Estimate gives the country's score on the aggregate indicator, in units of a standard normal distribution, i.e. ranging from approximately -2.5 to 2.5.

Government Effectiveness: Government Effectiveness captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies. Estimate gives the country's score on the aggregate indicator, in units of a standard normal distribution, i.e. ranging from approximately -2.5 to 2.5.

Political Stability and Absence of Violence/Terrorism: Political Stability and Absence of Violence/Terrorism measures perceptions of the likelihood of political instability and/or politically-motivated violence, including terrorism. Estimate gives the country's score on the aggregate indicator, in units of a standard normal distribution, i.e. ranging from approximately -2.5 to 2.5.

Regulatory Quality: Regulatory Quality captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development. number of sources indicates the number of underlying data sources on which the aggregate estimate is based. Comment by Econ16: Confusing – rewrite.

Methodology:

Model specification:

The most generally commonly used approaches of estimates the relationship between growth rate and its determinants as mentioned in equation (1) is the static panel data models. In this study, WeFollowing that, we are going to use panel data technique. Knowing thatT there are essentially three types of panel data models: namely, a pooled Ordinary Least Squire (OLS) regression, panel model with random effects and panel model with fixed effects. Using a pooled OLS regression, countries unobservable individual effects are not controlled so it they can influence measurements of the estimated parameters. The major problem with this model is that it does not distinguish between the various countries that I have. In other words, by combining multiple countries through pooling, I ignore the heterogeneity or individuality that may exist among the countries. The first pooled model that I am going to estimate is:

GDPpcgt = α + β1(FDIt) + β2(TRDt) + β3(GCFt) + β4(INFt) + β4(POPt) + t

Then I will estimate the following model with random effects and panel model with fixed effects. Thus, by combining countries’ unobservable individual effects, I can express the linear model as following:

Baseline:

GDPpcgit = α + β1(FDIit) + β2(TRDit) + β3(GCFit) + β4(INFit) + β4(POPit) + it

GDPpcgit = α + β1(FDIit) + β2(TRDit) + β3(GCFit) + β4(INFit) + β4(POPit) + Vit

Where: 

α = a constant term.

Vititit with itbeing countries’ unobservable individual effects. The difference between a pooled regression and a model considering unobservable individual effects lies on exactly in it. Where i denotes country, t denotes time and remainder it is the error term. To decide between whether using fixed effect or random effect we use the Hausman test. This test will tests the null hypothesis of non-existence of correlation between unobservable individual effects and the growth determinants, against the alternative hypothesis of existence of correlation. If the null hypothesis is rejected, we can conclude that correlation is relevant and therefore a panel model of fixed effects being is the most correct way of carrying out the analysis of the relationship between growth and its determinants. On the other hand, if the null hypothesis is not rejected we can conclude that correlation is not relevant and therefore a panel model of random effects being is the most appropriate way to carrying out analysis of the relationship between growth and its determinants.

Correlation matrix:

Tables (3-4-5-6-7-8-9-10) shows the correlation between the independent variables included in all the models, and does not show any serious collinearity problems.

Panel Unit Root Tests:

Running the Levin-Lin-Chu and Harris-Tzavalis tests to check and correct for unit roots in this type of model. it seems the panels does not contain unit-roots and the panels are stationary. Comment by Econ16: I find this result surprizing, given the variables, particularly GDP per capita. Lack of a unit root implies GDP per capita was not trended during the period.

Summary Statistics:

BRICS countries: Comment by Econ16: I’m not sure any of this is necessary. We can read a table. You might want to cut it.

Table (1) shows that on average the gross domestic product per capita growth is nearly 4.05% in all BRICS countries. In addition, the lowest rate is -7.8% and highest is about 13.6%. The standard deviation is nearly 3.9%. The second-row show that on average the percentage of the trade openness is about 44.14%. TMoreover, the lowest is 15.6% and the highest is more than 72.8%, while standard deviation is nearly 13.1%. The Third third row illustrates onshows the average the of infrastructure spending in the form of gross capital formation is nearly 26.5%. Also, tThe lowest is 14.8% and highest is more than 47.6%. The standard deviation is nearly 9.8%. On average, The foreign direct investment is approximately 1.46%. Also, Tthe lowest is -1.95% and the highest is more than 8.87%, The the standard deviation is nearly 1.7%. The mean of inflation rate is about 8.12% in the BRICS countries. Moreover, theThe lowest is about -1.40%, whilest the highest is approximately 85.7%, tThe standard deviation is nearly 10%. The sixth and the final row clarifies that, on average, percentage for population growth is about .93%. The highest is -.46% and the lowest is about 1.89%, t The standard deviation is nearly .66%.

G7 countries:

Table (2) shows that on average the gross domestic product per capita growth is nearly 1.11%% in all G7 countries. In addition,T the lowest rate is -5.9% and highest is about 5.5%,. tThe standard deviation is nearly 1.9. The second-row show that on average the percentage of the trade openness is about 50%. Moreover, the lowest is 18.3% and the highest is more than 85.9%, while standard deviation is nearly 18.0 The Third row illustrates on average the infrastructure spending in the form of gross capital formation is nearly 21.2%. Also, the lowest is 14.7% and highest is more than 30.8%. The standard deviation is nearly 2.7. On average, The foreign direct investment is approximately -.92%. Also, the lowest is -9.6%and the highest is more than 7.6% The standard deviation is nearly 2.1. The mean of inflation rate is about 1.5% in the G7 countries. Moreover, the lowest is about -1.3%, whilst the highest is approximately 4.4% The standard deviation is nearly 1.09. The sixth and the final row clarifies that on average percentage for population growth is about .49%. The highest is -1.8% and the lowest is about 1.20% The standard deviation is nearly .44 Comment by Econ16: Correct the units, particularly on SD. Tighten the sentences. Consider dropping it entirely.

Empirical Results:

The purpose of our empirical investigation is to analyze the effects of trade, FDI and infrastructures spending (GCF) on economic growth in developed and developing economies and to examine how trade, FDI and GCF interacts with governance indicators in advancing economic growth in developed and developing countries. We control for preexisting economic conditions by taking account for differences in macroeconomic policies and institutions in the host countries by including variables, such as inflation rate and population growth as one of the explanatory variables. 

We test the effects of trade, FDI and GCF on economic growth in a framework of cross-country equations utilizing data from 7 developed (G7) and 5 developing (BRICS) countries over the last three decades 1985-2015. The system has three equations, where the dependent variables isare the per-capita GDP growth rates. We constrained the model such that all three equations yield the same coefficients in the three time periods with the exception of the intercepts.  Comment by Econ16: Why?

The Regressions regressions presents the econometric results and compares alternative specifications for each economy. Tables (11) and (15) represent the growth estimations for the baseline regressions for our basic specification with explanatory variables of FDI, trade, GCF, inflation rate and population growth.

Our results afterF following the results of the Hausman test, show that most coefficients have the expected signs, particularly the nature and conditions of these economies which explain some of the signs change for some coefficients across specifications. The estimated R2 are generally low but reasonable given the cross-sectional nature of the data used.  Comment by Econ16: That’s not the result of the Hausman test. Comment by Econ16: Correct the exponent. Also, a low R-squared would be unusual for GDP PC. That may indicate model mis-specification. Compare this to other similar studies and report.

Growth estimation in Table (11) reveals that for the BRICS countries, FDI hasve a negative impact on economic growth after controlling for inflation rate and population growth. The estimated coefficient for FDI is negative and not statistically significant while the estimated coefficient for trade havse a positive impact on economic growth is statistically significant. Since the coefficient of trade is larger than the coefficient of FDI, it indicates the differential impact of trade in the host country’s economic growth. The coefficient for GCF is positive but not statistically significant, implying that infrastructure spending contributes to some degree positively to economic growth. The coefficient for inflation rate shows high inflation but it’s not statistically significant. and for Tthe coefficient population rate its statistically significant which may suggests that economic growth is not keeping up of the increase in population in these countries. For the G7 countries growth estimation in Table (15) shows almost similar results to the BRICS countries with the exception of GCF which may shows a highly increase in infrastructure spending in the G7 countries with a positive and statistically significant coefficient at a confidence level of 99%. The inflation rate and population rate have positive and statistically significant coefficients in which inflation coefficient shows a deflation problem in developed economies and over-population due to migration movement into these countries. Comment by Econ16: These two statements are in conflict. Resolve them. Comment by Econ16: You really can’t say that, given one is insignificant. Rephrase. Comment by Econ16: Again, this statement is in conflict. Resolve. Furthermore, you imply investment is not important – that’s in direct conflict with he literature. Comment by Econ16: It does not. Comment by Econ16: Unclear. Comment by Econ16: It does not. Comment by Econ16: Odd phrasing. Comment by Econ16: They do not. The coefficient can’t show a deflation problem, it can only show direction. Same about population.

Including interactions between governance indicators and trade, FDI and GCF not only improves the overall performance of the estimation but also allows us to capture their interaction effects on economic growth. For tThe growth estimation for the FDI (Tables 12-16). Table (12) which represent BRICS countries, the interaction of FDI and Government Effectiveness yields a positive and not statistically significant coefficient. while tThe effects of FDI and Control of Corruption, Political Stability, Regulatory Quality by themselves, are negative and not statistically significant. Table (16) which represent G7 countries, the interaction of FDI and Control of Corruption and Government Effectiveness and Control of Corruption yields a negative and not statistically significant coefficient. while tThe effects of FDI and Political Stability and Regulatory Quality by themselves, are positive and not statistically significant for the Political Stability and only statistically significant for Regulatory Quality. The estimated coefficients indicate that host countries benefit negatively from FDI, itself. But, only with FDI’s positive interaction with governance indicators it shows it generally FDI benefit from regulatory quality and not government interventions. Comment by Econ16: This is confusing. Rephrase.

Regression in tables (13-17) includes the governance indicators interactions with trade. Recent literature indicates that trade is greatly influenced by both a countries country’s policies, such as monetary, fiscal, and open-market policies. We include inflation rates, population growth rate to be proxies for monetary, fiscal policies and labor,. as well as institutions in the host nations. Inclusion of these policy variables significantly increases the explanatory power of the estimated system. For BRICS countries, Government Effectiveness and Political Stability yields a negative and statistically significant coefficient while the effects of Control of Corruption and Regulatory Quality, by themselves, are positive but only statistically significant for Regulatory Quality. For G7 countries, Control of Corruption, Government Effectiveness and Political Stability yields a positive and only statistically significant coefficient with Government Effectiveness at a confidence level of 99%. while tThe effects Regulatory Quality, by itself, is negative and statistically significant. This may imply that FDI and trade complement each other in advancing growth rate of income in developed and developing countries. This may also support the idea that flow of advanced technology brought along by FDI can increase the growth rate of the host economy by interacting with the host country’s trade movementactivity. Comment by Econ16: Not a sentence. Rewrite. Comment by Econ16: Something is missing here. Comment by Econ16: Odd phrasing.

The results from tables (14-18) shows infrastructures as GCF after interacting with governance indicators. For BRICS countries, Control of Corruption and Regulatory Quality yields a positive and statistically significant coefficients. while tThe effects Government Effectiveness and Political Stability, by themselves, is negative and not statistically significant. For G7 countries Control of Corruption, Government Effectiveness and Political Stability yields a positive and statistically significant coefficients. while tThe effects Regulatory Quality, by itself, is negative and not statistically significant. Those results is consistent with the idea that flow of advanced technology brought along by FDI and trade can increase in infrastructures spending which lead to increase in the growth rate of the host economy by open the market and increase the quality of the regulations in that economy. Comment by Econ16: But you said it was insignificant.

Conclusion

We have carried out a detailed research on the G7 and the BRICS economies. The cross-examination of these economies has revealed a number of things about trade, foreign direct investments as well infrastructural developments and their effects on the developed economies (G7 countries) and the developing economies (BRICS countries). While its apparent that both economies heavily rely on these economic attributes to spur growth in different economic pillars, their deployment in the period under consideration as seen in the literature is quite different.

Developing economies still lag behind in economic development due to decades of economic stagnation, poor living standards and sometimes environmental disasters which have left infrastructural development underutilized. For instance, the investment in infrastructure as a proportion of GDP proportion is about 10% in developing economies in comparison to 16% in developed countries. While the BRICS economies, especially in the Asian continent, are rapidly catching up with the developed nations, the rest of the developing economies, especially in the African continent, need to adopt sustainable economic policies to spur and sustain growth.

The world faces a growing need for governmental organizations to fund, maintain, upstage, develop, and expand infrastructures essential to ensuring sustained growth of economic productivity and activity. Developing economies need to save annually by eliminating all inefficiencies and also carry 100% capital budget execution. The relationship between infrastructure and economic growth is two-way: infrastructure creates growth in the economy and on the other hand, economic growth brings infrastructural changes. Transport infrastructure brings social and economic rewards and benefits to both the developing and developed economies. Benefits enjoyed include: improving market productivity and accessibility ensuring balanced economic development across different regions, creating employment and promoting labor mobility. Comment by Econ16: There’s that word again – I don’t know what you mean.

Significant growth rates are associated with countries embracing ongoing globalization and the increasing openness to international trade. Trade openness and economic policies have played a huge role in increasing the gap between the developing and developed economies. Trade policies play a crucial role in facilitating economic growth. Trade may affect the household incomes through specialization arising from realizing comparative advantage, realization from returns of economies of scales, technological spill overs from investments, improved communication channels, exposure to new services and goods, new production methods and new ways of organization behaviour. Comment by Econ16: Didn’t you argue earlier that this reduces the gap?

Numerous studies in the report have shown that there is a long run relationship between trade and economic growth. In addition, these research work haveIt has also shown that trade and economic growth are co-related, but their relationship is fortified by the stability in macroeconomic policies. The international community and donors recommend trade liberalization policies to developing economies in a bid of opening them and integrating them into the global market. The policies are driven by the failure of the import substitution strategy and also by findings from empirical studies that depict a more out ward and progressive economies record high economic growth rates. The quality of economic growth is brought up by the proportions of exports and the quality of output. Economists argue that trade liberalization encourages countries to specialize in sectors they possess high economies of scale thus promoting productivity and efficiency in the long run. Granted, the developing economies ought to concentrate on increasing their market and trade liberation as well as enactment of sustainable macroeconomic policies to ensure sustainable development in different pillars of their economies.

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Appendix:

Table 1 : Summary Statistics (BRICS countries)

Variable		Mean	Std. Dev.	Min	Max	Observations
GDP Per Capita Growth	overall	4.051634	3.975842	-7.84864	13.63634	N = 150
	between		3.04061	1.414176	8.704291	n = 5
	within		2.887277	-7.13366	11.17858	T = 30
Trade Openness	overall	44.14048	14.55914	15.63556	72.86539	N = 150
	between		13.15663	24.03089	56.53349	n = 5
	within		8.490714	26.74844	62.6276	T = 30
Gross Capital Formation (Infrastructure)	overall	26.56335	9.843585	14.8304	47.68586	N = 150
	Between		10.0159	18.98493	41.63164	n = 5
	within		3.978815	16.55681	36.96181	T = 30
Foreign Direct Investment	overall	1.460442	1.708628	-1.953148	8.875447	N = 150
	between		1.241273	-.0565215	2.957004	n = 5
	within		1.293967	-1.895827	2.957004	T = 30
Inflation	overall	8.120103	10.05303	-1.407892	85.74178	N = 150
	between		6.02441	2.237205	18.30486	n = 5
	within		8.469675	-5.114555	75.55703	T = 30
Population	overall	.9390005	.6663792	-.4600613	1.898395	N = 150
	between		.69844	-.1463098	1.553699	n = 5
	Within		.2233037	.4433678	1.394289	T = 30

Table 2 : Summary Statistics (G7 countries)

Variable		Mean	Std. Dev.	Min	Max	Observations
GDP Per Capita Growth	overall	1.113137	1.923743	-5.911711	5.599482	N = 210
	between		.4905147	.1813083	1.513505	n = 7
	within		1.868976	-5.615119	5.36773	T = 30
Trade Openness	overall	50.01865	18.01765	18.34896	85.99386	N = 210
	between		17.90907	26.09393	69.76039	n = 7
	within		6.909343	25.25499	66.25212	T = 30
Gross Capital Formation (Infrastructure)	overall	21.25835	2.77137	14.73386	30.86517	N = 210
	between		2.297033	17.5541	25.03047	n = 7
	within		1.76787	17.51318	27.09306	T = 30
Foreign Direct Investment	overall	-.9278694	2.139046	-9.659468	7.683088	N = 210
	between		.5145295	-1.812169	-.3422972	n = 7
	within		2.084937	-9.076755	7.718963	T = 30
Inflation	overall	1.59489	1.097425	-1.352837	4.48424	N = 210
	between		.7166116	.1278762	2.238621	n = 7
	within		.8723562	-.9992769	4.228968	T = 30
Population	overall	.4949775	.4468612	-1.853715	1.20396	N = 210
	between		.3926105	.0001052	.9993799	n = 7
	within		.2580928	-1.358842	1.352199	T = 30

Table 3 : Correlation Matrix: BRICS (Baseline)

Variable	GDP pcg	TRD	GCF	FDI	INF	POP
GDP pcg	1.0000
TRD	0.2290	1.0000
GCF	0.6712	0.1594	1.0000
FDI	0.1993	-0.2250	0.2597	1.0000
INF	-0.1554	0.2402	-0.2897	-0.2137	1.0000
POP	-0.2209	-0.4198	-0.0838	0.1218	-0.3739	1.0000

Table 4 : Correlation Matrix: BRICS (FDI with Governance Indicators)

Control of Corruption - Government Effectiveness - Political Stability - Regulatory Quality

Variable	GDP pcg	FDI*CC	FDI*GE	FDI*PS	FDI*RQ	TRD	GCF	INF	POP
GDP pcg	1.0000
FDI*CC	-0.4924	1.0000
FDI*GE	-0.0593	0.6284 Comment by Econ16: Fairly high collinearity.	1.0000
FDI*PS	-0.4896	0.4718	-0.1110	1.0000
FDI*RQ	-0.4333	0.6557 Comment by Econ16: Fairly high collinearity.	0.6160	0.3132	1.0000
TRD	0.2290	-0.0292	0.2625	-0.0554	-0.0879	1.0000
GCF	0.6712	-0.5942	-0.0963	-0.6181	-0.5283	0.1594	1.0000
INF	-0.1554	0.0850	-0.0701	0.1134	0.0545	0.2402	-0.2897	1.0000
POP	-0.2209	0.1005	0.0364	-0.0639	0.1485	-0.4198	-0.0838	-0.3739	1.0000

Table 5 : Correlation Matrix: BRICS (Trade with Governance Indicators)

Control of Corruption - Government Effectiveness - Political Stability - Regulatory Quality

Variable	GDP pcg	TRD*CC	TRD*GE	TRD*PS	TRD*RQ	FDI	GCF	INF	POP
GDP pcg	1.0000
TRD*CC	-0.2819	1.0000
TRD*GE	-0.1510	0.5401	1.0000
TRD*PS	-0.2778	0.4227	0.6202	1.0000
TRD*RQ	-0.3635	0.5264	0.6237 Comment by Econ16: Fairly high collinearity.	0.6081	1.0000
FDI	0.1993	0.2125	0.1516	0.3917	0.1077	1.0000
GCF	0.6712	-0.2803	-0.0276	-0.2156	-0.4460	0.2597	1.0000
INF	-0.1554	-0.3940	-0.4769	-0.4717	-0.2725	-0.2137	-0.2897	1.0000
POP	-0.2209	0.5646	0.6352	0.5374	0.5201	0.1218	-0.0838	-0.3739	1.0000

Table 6 : Correlation Matrix: BRICS (GCF “Infrastructure” with Governance Indicators)

Control of Corruption - Government Effectiveness - Political Stability - Regulatory Quality

Variable	GDP pcg	FDI*CC	FDI*GE	FDI*PS	FDI*RQ	TRD	GCF	INF	POP
GDP pcg	1.0000
GCF*CC	-0.4620	1.0000
GCF*GE	-0.0717	0.5601	1.0000
GCF*PS	-0.4200	0.6886	0.3171	1.0000
GCF*RQ	-0.4811	0.6353	0.5028	0.6963	1.0000
FDI	0.1993	0.0685 Comment by Econ16: Fairly high collinearity.	0.1090	0.2370	0.0578	1.0000
TRD	0.2290	-0.2470	0.1640	-0.1794	-0.0370	-0.2250	1.0000
INF	-0.1554	-0.1335	-0.3696	-0.1097	-0.0564	-0.2137	0.2402	1.0000
POP	-0.2209	0.6052 Comment by Econ16: Fairly high collinearity.	0.5108	0.1579	0.3537	0.1218	-0.4198	-0.3739	1.0000

Table 7 : Correlation Matrix: G7 (Baseline)

Variable	GDP pcg	TRD	GCF	FDI	INF	POP
GDP pcg	1.0000
FDI	-0.0797	1.0000
TRD	0.0720	-0.0073	1.0000
GCF	0.1256	-0.0225	-0.3789	1.0000
INF	0.1370	0.0864	0.2135	-0.2554	1.0000
POP	-0.0778	0.1363	-0.0262	-0.0587	0.3019	1.0000

Table 8 : Correlation Matrix: G7 (FDI with Governance Indicators)

Control of Corruption - Government Effectiveness - Political Stability - Regulatory Quality

Variable	GDP pcg	FDI*CC	FDI*GE	FDI*PS	FDI*RQ	TRD	GCF	INF	POP
GDP pcg	1.0000
FDI*CC	-0.1109	1.0000
FDI*GE	-0.1020	0.6901	1.0000
FDI*PS	-0.0683	0.5416	0.6455	1.0000
FDI*RQ	-0.0882	0.6847 Comment by Econ16: Fairly high collinearity.	0.6695	0.6037	1.0000
TRD	0.0720	-0.0235	-0.0170	-0.0102	-0.0341	1.0000
GCF	0.1256	0.0200	0.0041	0.0071	0.0328	-0.3789	1.0000
INF	0.1370	0.0950	0.0928	0.1343	0.0529	0.2135	-0.2554	1.0000
POP	-0.0778	0.1253	0.1161	0.1617	0.1172	-0.0262	-0.0587	0.3019	1.0000

Table 9 : Correlation Matrix: G7 (Trade with Governance Indicators)

Control of Corruption - Government Effectiveness - Political Stability - Regulatory Quality

Variable	GDP pcg	TRD*CC	TRD*GE	TRD*PS	TRD*RQ	FDI	GCF	INF	POP
GDP pcg	1.0000
TRD*CC	0.2493	1.0000
TRD*GE	0.2404	0.5785	1.0000
TRD*PS	0.2067	0.5601	0.5608	1.0000
TRD*RQ	0.1564	0.6210 Comment by Econ16: Fairly high collinearity.	0.6169	0.6014	1.0000
FDI	-0.0797	-0.0386	-0.0490	-0.0574	0.0122	1.0000
GCF	0.1256	-0.1949	-0.2172	0.0195	-0.3730	-0.0225	1.0000
INF	0.1370	0.1124	0.1416	0.0444	0.2365	0.0864	-0.2554	1.0000
POP	-0.0778	0.0892	0.1201	-0.1032	0.1128	0.1363	-0.0587	0.3019	1.0000

Table 10 : Correlation Matrix: G7 (GCF “Infrastructure” with Governance Indicators)

Control of Corruption - Government Effectiveness - Political Stability - Regulatory Quality

Variable	GDP pcg	FDI*CC	FDI*GE	FDI*PS	FDI*RQ	TRD	GCF	INF	POP
GDP pcg	1.0000
GCF*CC	0.3386	1.0000
GCF*GE	0.3413	0.5349	1.0000
GCF*PS	0.1644	0.3954	0.4091	1.0000
GCF*RQ	0.2818	0.6968 Comment by Econ16: Fairly high collinearity.	0.6446	0.1248	1.0000
FDI	-0.0797	-0.0754	-0.0852	-0.0485	0.0257	1.0000
TRD	0.0720	0.1870	0.0402	-0.0519	0.2029	-0.0073	1.0000
INF	0.1370	-0.0515	-0.0490	-0.3003	0.2221	0.0864	0.2135	1.0000
POP	-0.0778	0.1692	0.2307	-0.2150	0.3660	0.1363	-0.0262	0.3019	1.0000

Table 11 : Growth Model Estimation - BRICS (Baseline)

Dependent variable: GDP per capita growth
Independent variable	Pooled	(Fixed Effect)	(Random Effect)
FDI	.1644	-.0502	.1644
	(.1858)	(.2211)	(.1858)
TRD	.0252	.1104**	.0252
	(.0233)	(.0472)	(.0233)
GCF	.0247*	-.0791	.2474*
	(.0337)	(.0896)	(.0337)
INF	-.0170	-.0483	-.0170
	(.0340)	(.0352)	(.0340)
POP	-.9282***	-.2.861***	-.9282***
	(.5156)	(1.568)	(1.587)
Constant	-2.863	4.431	-2.863
	(1.587)	(3.414)	(1.587)
Model summary
R²	0.4875
F-Test	17.88
Fixed Effect (F-Test)		3.84
Random Effect (Wald)			89.41
Hausman test		0.005
Countries included	5	5	5
Total panel observations	150	150	150
Note : 1- The Hausman test has χ2 distribution and tests the null hypothesis that unobservable individual effects are not correlated with the explanatory variables, against the null hypothesis of correlation between unobservable individual effects and the explanatory variables. Comment by Econ16: Alternative? 2- The F test has normal distribution N(0,1) and tests the null hypothesis of insignificance as a whole of the estimated parameters, against the alternative hypothesis of significance as a whole of the estimated parameters. 3- *** and *denote significance at 1 and 10 % level of significance respectively. 4- The Wald test has χ2 distribution and tests the null hypothesis of insignificance as a whole of the parameters of the explanatory variables, against the alternative hypothesis of significance as a whole of the parameters of the explanatory variables. 5- The figure in parenthesis below the coefficient estimates are standard error.

Table 12 : Growth Model Estimation - BRICS (FDI with Governance Indicators)

Control of Corruption - Government Effectiveness - Political Stability - Regulatory Quality

Dependent variable: GDP per capita growth
Independent variable	Pooled	(Fixed Effect)	(Random Effect)
FDI*CC	-.8329	-.4475	-.8329
	(.7193)	(.8597)	(.7193)
FDI*GE	.8825	-.1910	.8825
	(.9436)	(1.041)	(.9436)
FDI*PS	-.4483	-.0061	-.4483
	(.5953)	(.6137)	(.5953)
FDI*RQ	-.6049	.3815	-.6049
	(.8233)	(.9771)	(.8233)
TRD	.0119	.0993***	.0119
	(.0267)	(.0530)	(.0267)
GCF	.1701*	-.0782	.1701*
	(.0479)	(.0917)	(.0479)
INF	-.0247	-.0522	-.0247
	(.0354)	(.0368)	(.0354)
POP	-.9903***	-.3.117***	-.9903***
	(.5226)	(1.802)	(.5226)
Constant	-.4013	4.978	-.4013
	(1.889)	(3.683)	(1.889)
Model summary
R²	0.515
F-test	12.07
Fixed effect ( F-test )		2.81
Random Effect (Wald)			96.53
Hausman test		0.201
Countries included	5	5	5
Total panel observations	150	150	150
Note : 1- The Hausman test has χ2 distribution and tests the null hypothesis that unobservable individual effects are not correlated with the explanatory variables, against the null hypothesis of correlation between unobservable individual effects and the explanatory variables. 2- The F test has normal distribution N(0,1) and tests the null hypothesis of insignificance as a whole of the estimated parameters, against the alternative hypothesis of significance as a whole of the estimated parameters. 3- *** and *denote significance at 1 and 10 % level of significance respectively. 4- The Wald test has χ2 distribution and tests the null hypothesis of insignificance as a whole of the parameters of the explanatory variables, against the alternative hypothesis of significance as a whole of the parameters of the explanatory variables. 5- The figure in parenthesis below the coefficient estimates are standard error.

Table 13 : Growth Model Estimation - BRICS (TRADE with Governance Indicators)

Control of Corruption - Government Effectiveness - Political Stability - Regulatory Quality

Dependent variable: GDP per capita growth
Independent variable	Pooled	(Fixed Effect)	(Random Effect)
TRD*CC	.0522	.0159	.0522
	(.0340)	(.0383)	(.0340)
TRD*GE	-.0997**	-.0820	-.0997**
	(.0447)	(.0542)	(.0447)
TRD*PS	-.0496**	-.0587***	-.0496**
	(.0215)	(.0321)	(.0215)
TRD*RQ	.0883***	.1101**	.0883***
	(.0487)	(.0536)	(.0487)
FDI	.1709	-.0075	.1709
	(.2095)	(.2248)	(.2095)
GCF	.3176*	.0688	.3176*
	(.0520)	(.0993)	(.0520)
INF	-.0484	-.0509	-.0484
	(.0379)	(.0385)	(.0379)
POP	-1.121	-2.884***	-1.121
	(.7187)	(1.620)	(.7187)
Constant	-3.4289	4.383	-3.428
	(1.6174)	(3.424)	(1.617)
Model summary
R²	0.527
F-test
Fixed effect ( F-test )		2.60
Random Effect (Wald)			101.64
Hausman test		0.288
Countries included	5	5	5
Total panel observations	150	150	150
Note : 1- The Hausman test has χ2 distribution and tests the null hypothesis that unobservable individual effects are not correlated with the explanatory variables, against the null hypothesis of correlation between unobservable individual effects and the explanatory variables. 2- The F test has normal distribution N(0,1) and tests the null hypothesis of insignificance as a whole of the estimated parameters, against the alternative hypothesis of significance as a whole of the estimated parameters. 3- *** and *denote significance at 1 and 10 % level of significance respectively. 4- The Wald test has χ2 distribution and tests the null hypothesis of insignificance as a whole of the parameters of the explanatory variables, against the alternative hypothesis of significance as a whole of the parameters of the explanatory variables. 5- The figure in parenthesis below the coefficient estimates are standard error.

Table 14 : Growth Model Estimation - BRICS (GCF “Infrastructure” with Governance Indicators)

Control of Corruption - Government Effectiveness - Political Stability - Regulatory Quality

Dependent variable: GDP per capita growth
Independent variable	Pooled	(Fixed Effect)	(Random Effect)
GCF*CC	-.0014	.1551**	-.0014
	(.0716)	(.0709)	(.0716)
GCF*GE	.0450	-.0855	.0450
	(.0694)	(.0743)	(.0694)
GCF*PS	-.0617	-.0383	-.0617
	(.0454)	(.0543)	(.0454)
GCF*RQ	-.1470	.2103**	-.1470
	(.0899)	(.0944)	(.0899)
FDI	.6566*	-.1631	.6566*
	(.2072)	(.2194)	(.2072)
TRD	.0600***	.1455*	.0600***
	(.0318)	(.0471)	(.0318)
INF	-.0830**	-.0639***	-.0830**
	(.0388)	(.0336)	(.0388)
POP	-.8086	-3.039***	-.8086
	(.8483)	(1.555)	(.8483)
Constant	.3335	2.795	.3335
	(1.906)	(3.024)	(1.906)
Model summary
R²	0.410
F-test	7.90
Fixed effect ( F-test )		4.06
Random Effect (Wald)			63.22
Hausman test		0.000
Countries included	5	5	5
Total panel observations	150	150	150
Note : 1- The Hausman test has χ2 distribution and tests the null hypothesis that unobservable individual effects are not correlated with the explanatory variables, against the null hypothesis of correlation between unobservable individual effects and the explanatory variables. 2- The F test has normal distribution N(0,1) and tests the null hypothesis of insignificance as a whole of the estimated parameters, against the alternative hypothesis of significance as a whole of the estimated parameters. 3- *** and *denote significance at 1 and 10 % level of significance respectively. 4- The Wald test has χ2 distribution and tests the null hypothesis of insignificance as a whole of the parameters of the explanatory variables, against the alternative hypothesis of significance as a whole of the parameters of the explanatory variables. 5- The figure in parenthesis below the coefficient estimates are standard error.

Table 15 : Growth Model Estimation – G7 (Baseline)

Dependent variable: GDP per capita growth
Independent variable	Pooled	(Fixed Effect)	(Random Effect)
FDI	-.0688	-.0533	-.0577
	(.0754)	(.0707)	(.0721)
TRD	.0110	.0540**	.0266
	(.0097)	(.0248)	(.0170)
GCF	.1456**	.4018*	.2656*
	(.0634)	(.0976)	(.0833)
INF	.3683**	.0389	.2320
	(.1596)	(.1785)	(.1682)
POP	-.4984	-2.248*	-1.460*
	(.3789)	(.5774)	(.5043)
Constant	-2.937	-9.132	-5.567
	(1.647)	(2.828)	(2.273)
Model summary
R²	0.077
F-Test	2.26
Fixed Effect (F-Test)		6.89
Random Effect (Wald)			22.73
Hausman test		0.047
Countries included	7	7	7
Total panel observations	210	210	210
Note : 1- The Hausman test has χ2 distribution and tests the null hypothesis that unobservable individual effects are not correlated with the explanatory variables, against the null hypothesis of correlation between unobservable individual effects and the explanatory variables. 2- The F test has normal distribution N(0,1) and tests the null hypothesis of insignificance as a whole of the estimated parameters, against the alternative hypothesis of significance as a whole of the estimated parameters. 3- *** and *denote significance at 1 and 10 % level of significance respectively. 4- The Wald test has χ2 distribution and tests the null hypothesis of insignificance as a whole of the parameters of the explanatory variables, against the alternative hypothesis of significance as a whole of the parameters of the explanatory variables. 5- The figure in parenthesis below the coefficient estimates are standard error.

Table 16 : Growth Model Estimation – G7 (FDI with Governance Indicators)

Control of Corruption - Government Effectiveness - Political Stability - Regulatory Quality

Dependent variable: GDP per capita growth
Independent variable	Pooled	(Fixed Effect)	(Random Effect)
FDI*CC	-1.229*	-.6833	-1.229*
	(.4288)	(.4560)	(.4288)
FDI*GE	.2774	-.1195	.2774
	(.3087)	(.3323)	(.3087)
FDI*PS	.5289***	.3918	.5289***
	(.2793)	(.2775)	(.2793)
FDI*RQ	.8136*	.6991**	.8136*
	(.2937)	(.2988)	(.2937)
TRD	.0106	.0674*	.0106
	(.0094)	(.0252)	(.0094)
GCF	.1527**	.4219*	.1527**
	(.0621)	(.0978)	(.0621)
INF	.4566*	.0857	.4566*
	(.1598)	(.1810)	(.1598)
POP	-.5805	-2.152*	-.5805
	(.3718)	(.5802)	(.3718)
Constant	-3.110	-10.33	-3.110
	(1.616)	(2.846)	(1.616)
Model summary
R²	0.147
F-test	2.83
Fixed effect ( F-test )		5.19
Random Effect (Wald)			22.64
Hausman test		0.000
Countries included	7	7	7
Total panel observations	210	210	210
Note : 1- The Hausman test has χ2 distribution and tests the null hypothesis that unobservable individual effects are not correlated with the explanatory variables, against the null hypothesis of correlation between unobservable individual effects and the explanatory variables. 2- The F test has normal distribution N(0,1) and tests the null hypothesis of insignificance as a whole of the estimated parameters, against the alternative hypothesis of significance as a whole of the estimated parameters. 3- *** and *denote significance at 1 and 10 % level of significance respectively. 4- The Wald test has χ2 distribution and tests the null hypothesis of insignificance as a whole of the parameters of the explanatory variables, against the alternative hypothesis of significance as a whole of the parameters of the explanatory variables. 5- The figure in parenthesis below the coefficient estimates are standard error.

Table 17 : Growth Model Estimation – G7 (TRADE with Governance Indicators)

Control of Corruption - Government Effectiveness - Political Stability - Regulatory Quality

Dependent variable: GDP per capita growth
Independent variable	Pooled	(Fixed Effect)	(Random Effect)
TRD*CC	.0246	.0197	.0246
	(.0171)	(.0196)	(.0171)
TRD*GE	.0070	.0645*	.0070
	(.0199)	(.0234)	(.0199)
TRD*PS	-.0060	.0174	-.0060
	(.0117)	(.0155)	(.0117)
TRD*RQ	-.0262***	-.0368**	-.0262***
	(.0139)	(.0152)	(.0139)
FDI	-.0387	.0071	-.0387
	(.0732)	(.0656)	(.0732)
GCF	.1078	.4594*	.1078
	(.0695)	(.0867)	(.0695)
INF	.4500*	-.0747	.4500*
	(.1569)	(.1641)	(.1569)
POP	-.7148***	-1.602*	-.7148***
	(.3841)	(.5555)	(.3841)
Constant	-1.961	-12.25	-1.961
	(1.707)	(2.328)	(1.707)
Model summary
R²	0.169
F-test	3.35
Fixed effect ( F-test )		8.84
Random Effect (Wald)			26.82
Hausman test		0.000
Countries included	7	7	7
Total panel observations	210	210	210
Note : 1- The Hausman test has χ2 distribution and tests the null hypothesis that unobservable individual effects are not correlated with the explanatory variables, against the null hypothesis of correlation between unobservable individual effects and the explanatory variables. 2- The F test has normal distribution N(0,1) and tests the null hypothesis of insignificance as a whole of the estimated parameters, against the alternative hypothesis of significance as a whole of the estimated parameters. 3- *** and *denote significance at 1 and 10 % level of significance respectively. 4- The Wald test has χ2 distribution and tests the null hypothesis of insignificance as a whole of the parameters of the explanatory variables, against the alternative hypothesis of significance as a whole of the parameters of the explanatory variables. 5- The figure in parenthesis below the coefficient estimates are standard error.

Table 18 : Growth Model Estimation – G7 (GCF “Infrastructure” with Governance Indicators)

Control of Corruption - Government Effectiveness - Political Stability - Regulatory Quality

Dependent variable: GDP per capita growth
Independent variable	Pooled	(Fixed Effect)	(Random Effect)
GCF*CC	.0101	.1051**	.0101
	(.0438)	(.0511)	(.0438)
GCF*GE	.0595	.1145***	.0595
	(.0488)	(.0582)	(.0488)
GCF*PS	.0064	.0743**	.0064
	(.0231)	(.0311)	(.0231)
GCF*RQ	.0099	-.0628	.0099
	(.0398)	(.0428)	(.0398)
FDI	-.0332	.0217	-.0332
	(.0722)	(.0677)	(.0722)
TRD	-.0015	.0887*	-.0015
	(.0095)	(.0248)	(.0095)
INF	.4049**	.0205	.4049**
	(.1616)	(.1672)	(.1616)
POP	-.9994**	-1.433**	-.9994**
	(.4021)	(.5626)	(.4021)
Constant	-1.573	-8.977	-1.573
	(.9289)	(2.046)	(.9289)
Model summary
R²	0.192
F-test	3.90
Fixed effect ( F-test )		7.31
Random Effect (Wald)			31.20
Hausman test		0.000
Countries included	7	7	7
Total panel observations	210	210	210
Note : 1- The Hausman test has χ2 distribution and tests the null hypothesis that unobservable individual effects are not correlated with the explanatory variables, against the null hypothesis of correlation between unobservable individual effects and the explanatory variables. 2- The F test has normal distribution N(0,1) and tests the null hypothesis of insignificance as a whole of the estimated parameters, against the alternative hypothesis of significance as a whole of the estimated parameters. 3- *** and *denote significance at 1 and 10 % level of significance respectively. 4- The Wald test has χ2 distribution and tests the null hypothesis of insignificance as a whole of the parameters of the explanatory variables, against the alternative hypothesis of significance as a whole of the parameters of the explanatory variables. 5- The figure in parenthesis below the coefficient estimates are standard error.