Research proposal

Over the years, there have been several studies with the objective of finding out the relationship between foreign direct investment and level of economic growth. The topic has even been of paramount importance in the recent years as a result of the emergence of the emergence of the endogenous growth theories. This combined with the externality-led growth has necessitated the inclusion of foreign direct investment as a major component of a country’s economic growth (Ṣabrī, 2008). There has also been a notable increase in foreign capital flow especially in the 21st century.

Nevertheless, there has always been a gap in answering the question of how foreign direct investment relates to economic growth. The presence of conflicting evidence makes this a plausible research topic. One side of the topic argues that FDI is an element in the solution to scarcity problem of local capital and below par productivity in most of these developing countries. Despite the concept of FDI being viewed as a growth enhancing element to the host country, there have also been many people opposing this concept. Opponents of this aspect argue that FDI has no robust impact on the economic growth and other important aspects make a critical contribution to the overall productivity. There are also major emerging questions as to whether extractive or manufacturing FDI is responsible for enhancing economic development.

Though some studies have proved FDI as an important element for economic growth, there are also other important elements that should be put into consideration. There are also major concerns as to how to attract more FDI in the developing countries. Nevertheless, it is vital that the concept of the FDI on economic growth and determining the determinants for increased FDI flows to the receiving country becomes an essential area of discussion.  Previous empirical studies have exhibited contrasting results about the relationship between FDI and economic growth in Kuwait. The research proposal will try to address the cause of the disparities in these results. For instance, use of varying models or different econometric techniques in testing and estimation could the major reasons behind these disparities (Aldabbous, 2013). Despite these disparities, the need for the research remains a plausible course to avoid unnecessary generalizations.

It is imperative noting that the research paper does not intend to determine how the two variables affect each other. Instead, the paper will try to understand the causal relationship between the two variables to the economic development of Kuwait. Though the research may be presumed as a duplication of previous researches, it is worth noting that this will be a unique research in different perspectives. For example, the research is conducted after the new FDI laws introduced in Kuwait in 2013. It is also our hope that we will use a totally different approach as compared with other researches.  Additionally, the research will assume that the relationship between economic growth and foreign direct investment may run in either or both directions (Ṣabrī, 2008). To achieve this assumption, the research process will employ heterogeneous panel causality

test to enable detecting the direction of causality between the different variables.

References

Aldabbous, M. (2013). Entry mode Methods for Foreign Direct Investment to Kuwait. Saarbrücken: LAP LAMBERT Academic Publishing.

Ṣabrī, N. (2008). Financial markets and institutions in the Arab economy. New York: Nova Science Publishers.

Introduction

Foreign direct investment (FDI) is considered an important tool for the economic growth of a country. It is a dream of every country, whether developed or undeveloped, to cultivate and enhance foreign direct investment in their countries. For several years, most countries have viewed this as an opportunity to fill the gap between the desired investments and domestically mobilized savings. The host countries also see it as an opportunity to increase tax revenues, improvement in technology and also labor skills in these countries. It is more so an important area of consideration especially for the developing countries since it offers them the basis for development thus breaking the vicious cycle of poverty prevalent in these nations (Aldabbous, 2013). Over the years, there have been several debates on the effects of FDI to on economic growth especially in developing countries. This is because there is a tendency of capital flow developed countries to the developing countries.

In this chapter, we will have a deep analysis of the impact of foreign direct investment in the Republic of Kuwait. Although Kuwait is referred by some as a developed country, it is worth noting that the country is still developing in some aspects. Though Kuwait has some economic strength resulting from the income from oil and gas products, the country is still behind in political, social and cultural aspects. The topic of foreign direct investment in Kuwait becomes an important topic since for several years; the country had strict restrictions on international business (Arestis, Baddeley & McCombie, 2007). The topic also becomes of great importance due to the conflicting evidence regarding the extent to how FDI affects economic growth. In the paper, we will have insights on how best to improve FDI and the major constraints towards this noble course. Essential recommendations and a conclusion will summarize the research paper.

Literature review

There is abundant literature regarding the concern as to what effects, extent and how FDI affects economic growth and also its contribution to capital accumulation and technology transfer in Kuwait. It is also prudent noting that FDI has an indirect contribution to host country through direct transfer of technology (Driffield & Jones, 2013). The researches have proved that technology transfer leads to increased knowledge in the receiving country through increased skill acquisition, labor training and improved management practices and organizational arrangements. It is also critical noting that there are also varied effects of FDI in the host country depending on the long term and short term effects. Neo-classical and externality-based growth models have also proposed different FDI economic growth relationship in Kuwait and other developing countries. For instance, neo-classical model have suggested that FDI has only short-term effects on economic growth resulting from the diminishing returns of capital in the long run.

Development in international business has resulted in increased importance in the debate over effects of FDI on economic development. Effective international business is mostly a result if effective foreign direct investment. With the increased globalization and openness in international business has brought about increased impact of FDI in global economies. Nevertheless, studies have indicated a speedy growth in FDI as compared to international production within the context of international trade. It is on this premise that economists have argued that FDI forms a major tool for spreading the international wealth. Recent studies have indicated that FDI had risen to $1.24 trillion in 2010 (Driffield & Jones, 2013). It is, however, imperative noting that this was about 15% as compared to the global economic recession period of 2008. The change of the FDI between the pre-crisis and post economic crisis is much less as compared o the international trade and global output.  The researches have also indicated a possible increase in future to surpass the peak experienced in 2007 (Arestis, Baddeley & McCombie, 2007). It is, however, paramount noting that economists have raised the alarm that this projected growth can only be realized if there are no unpredicted economic shocks and other risk factors.  These assumptions still hold for the effects of FDI on the economic development of Kuwait.

Further studies have also suggested contrasting results from the neo-classical model. It has been suggested that long run economic growth resulting from foreign direct investment can only be achieved if both technological advances and exogenous labor force are eminent as proposed by the endogenous growth models. This long-run economic development is associated with permanent knowledge transfer associated with FDI. Such externalities will be essential in accounting for the diminishing returns eminent in the long run (Aldabbous, 2013). This implies that if FDI among other determinants is made endogenous in the model, then long run effects of FDI will consequently follow.  Technology spillovers then become an important aspect of FDI effects on economic growth.

Additionally, there are also studies that have suggested that there are other determinants of the effects of FDI on the economic growth. The degree of complementarity and substitution between domestic investment and FDI among other characteristics of the host country has been cited as possible determinants of this course. An Economic and social condition in Kuwait has also been cited as major factors that determine the extent of the FDI in this country. It is also paramount understanding that local financial markets have also been a significant determinant of the FDI effect to economic growth in Kuwait.  With this in mind, negative effects of FDI on economic growth can be eminent if there are substantial reverse flows in terms of profit remittances and other withdrawals, especially from multinational companies (Ṣabrī, 2008). The presence of adequate human capital is also cited as another crucial determinant of the long-term effects of FDI on economic growth.

Other empirical studies have also been actively involved in the analysis of the FDI-economic growth relationship based on determinants of FDI flow and the recipient country’s attractiveness to FDI flows.   The size and volume of such capital flows have also been noted as major determinants to the causal relationship between the two variables (Driffield & Jones, 2013). For instance, the institutional factors prevalent in Kuwait such as trade policies, the degree of openness and the legislative environment in the country have substantially affected the effectiveness of FDI to the economic development.  Political and economic stability of the recipient country is also major determinants of the effectiveness of the FDI effect on growth. Literature has confirmed that incentives such as rebates and tax breaks can be essential tools for increased FDI attractiveness (FAO., 2012). It has however been noted with great concern that adoption of these incentives can at times be detrimental to the overall economic stability of the country.

Empirical studies have also explored the determinants of foreign direct investment in GDP, population and infrastructure being other major determinants. Country risk, the level of education, research and domestic investment are also other major determinants of the effects of FDI on economic growth (Arestis, Baddeley & McCombie, 2007). On this note, there is also need to understand factors that affect the GDP and FDI. It has therefore been of paramount importance to understand the different factors that affect both GDP and FDI. It has also been noted that the size f domestic market is also another determinant of the effectiveness of the FDI to economic growth. Previous studies have indicated that a country with growing real income and consequently growing domestic purchasing power is a key driver to FDI (Ṣabrī, 2008). It is, however, essential noting that regional trade and the trade between the recipient country and other countries is also significant to the effects of FDI.

In this research, we will take a different angle to get more specific results. Instead of presuming the relationship between economic growth and FDI, the research process will involve testing causal relationship between the two variables. Confirmation of such causal relationship can be illustrated using econometric techniques suitable for panel data analysis. Panel data analysis, developed by Holtz-Eakin, Newey and Rosen has been used in various past analyzes and offers a great chance for causal-effect analysis (Driffield & Jones, 2013). However, according to Choe, this analysis proved a bi-direction relationship between FDI and economic growth. Nevertheless, the study confirmed a weak causal relationship between FDI and economic growth.  It is on this premise that this research paper will research on the relationship between economic growth and FDI in Kuwait. Growth of gross domestic product of his country will also be of major consideration in the research process.

Empirical results

After the analysis, it is evident that Kuwait among the rest of the GCC countries has also embraced the importance of attracting FDI. This is evidenced by the relentless efforts aimed at attracting more foreign investment and foreign capital. The motivation towards increased foreign direct investment is to increase sustainable economic growth in the country despite numerous earnings from the export of oil and gas products (Arestis, Baddeley & McCombie, 2007). To validate this objective, the country has strived to increase private investment, enhance technological capacities and also to improve the competitiveness of their exports in the world market.  The government of Kuwait has also increased better employment opportunities in the private sector as well as increased openness in the inflow of foreign capital. This is motivated by the desire of the economy to realize invisible financial resources, raise efficiency and enhance technological advances.

From the analysis, it is also clear that foreign direct investment has accounted for a greater share of the value of the gross domestic product in Kuwait’s economy. It is, however, worth noting that Kuwait among other the GCC countries is the poorest performing countries in terms foreign direct investment (Aldabbous, 2013). The empirical study also proved that foreign direct investment in the country surpasses the economy size of the economy. It is crystal clear that there exist a certain relationship between the economic growth and foreign direct investment in the country.

The empirical results have also confirmed integration between the foreign direct investment and gross domestic product. It was also critical to determine whether a cointegration relationship between these variables existed and positive results were confirmed. The effect of a long run and short run foreign direct investment was also another area of concern. This is confirmed by use of Pedroni’s heterogeneous panel test to determine the long-run effects of FDI. The results of this test indicated that there was a long run co-movement of gross domestic product and foreign direct investment in the long run (Arestis, Baddeley & McCombie, 2007). This is a clear indication that Kuwait’s gross domestic product and foreign direct investment have a long run steady relationship. The relationship between FDI and GDP exists despite other determinants existing in the economic, social or political aspects.

The established relationship between gross domestic product and foreign direct investment can also lead to a conclusion that there is a long-run relationship between these two variables. This relationship is bound to exist despite their non-stationary status. It therefore goes without saying there is causality between foreign direct investment and gross domestic product either in one direction or both directions.

The confirmation of the long run relationship between the two variables leads to the importance of testing causality hypothesis. This test will be based on the problem of joint endogeneity of foreign direct investment and gross domestic product and the possibility of two-way causality (FAO., 2012). The analysis will involve the use of homogeneous effects of the economy.  Assuming a heterogeneous effect may result in biased results. Causality hypothesis will only be viable if the testing process uses unbiased estimation process. In essence, the result confirms a causality relationship between foreign direct investment and gross domestic product (Ṣabrī, 2008). The empirical study indicates a bi-directional causality is running between foreign direct investment and gross domestic product.

The research to unearth the impact of foreign direct investment in the economy of Kuwait has different perspectives. In the empirical study, different aspects such as technology and overall productivity experienced in the economy resulting from the effects of foreign capital inflows are the main motivation for the analysis (Driffield & Jones, 2013). The research process assumed a non-linear relationship and largely depended on absorptive capacity.  It is however of paramount importance to use this analysis of Kuwait to have a clear picture what foreign direct investment to economies of developing economies.

The empirical research also concluded that the trend in the inflow of foreign direct investment in Kuwait as compared to other GCC countries is very low. The trend is even worse compared to the rest of the world. There is a great disparity between the foreign direct investments in Kuwait as compared with other regions of developing countries. It has been noted with great concern that the gap has been increasing every year until after 2013 after legislation of the new FDI laws. There has been a significant rise in foreign direct investment annually in billion dollars.  It is however been noted with great concern that Kuwait has been registering the least terms in FDI inflows in the GCC countries (Aldabbous, 2013). Overreliance on oil and gas revenues and lack of trade openness in Kuwait explains the dismal performance of foreign direct investment in Kuwait. Foreign direct investment in other developing countries has been on an upward trend while the trend in the inflow of foreign direct investment in Kuwait has wanted compared to economies within the same level.  It is, however, essential to conclude that there is a positive relationship between foreign direct investment and real gross domestic product growth. Any variation between the two variables can be explained the difference in the FDI inflows.

Conclusions and implications

From the above analysis, it is noted that Kuwait has been receiving the least fraction of the FDI as compared to other developing countries. This observation is clear to both the absolute terms and also compared to gross domestic product. Despite the global increase in terms of foreign direct investment in other countries since the 1990s, Kuwait has not made such milestones. This is a clear indication that Kuwait and other members of GCC have been left behind in the attraction of foreign direct investment especially during FDI boom periods (Arestis, Baddeley & McCombie, 2007).  This is contrary to other developing countries that have more diversified economies that have strived to attract FDI inflows. Kuwait has heavily over-relied on revenues from oil and gas neglecting the great contribution made by the foreign capital inflows.

Unlike other research papers, this research has put more emphasis on exploring the direction of interaction between economic growth and foreign direct investment in Kuwait by use of cointegration framework.  The research paper has not presumed a causality relationship between the two variables as has been the case with other studies. In the research, time series data has been of great importance to test the significance of FDI to the economic development of Kuwait.  It has been prudent noting that reverse causality between the two parameters has also been discussed at length to have a clear analysis of the relationship between the two variables to developing economies (Aldabbous, 2013). From the analysis, it is clear that FDI has been an integral component of economic growth in Kuwait. It imperative noting that this has also been confirmed by other researches. The bi-directional causality relationship between GDP and FDI has major implications for the economy of Kuwait and other developing economies.

The research findings can be of great importance to the overall economic development in Kuwait. From the research, it is evident that Kuwait has failed to tap the full potential of FDI inflows in the country. There is still room for improvement as far as FDI inflows in this country is concerned. Realization of this potential will only be realized if the state puts in place incentives that lead to increased attractiveness to FDI in these economies. The findings conclude that though FDI leads to growth in GDP, the increased GDP also attracts more FDI to the economy. This implies that these two concepts are essential to policymakers and are precedent to each other (Arestis, Baddeley & McCombie, 2007). Though incentives to FDI inflows are important, there should be further research to determine the best level of FDI inflows. Domestic investors should also be given an opportunity to thrive and hence it is paramount for policymakers in developing countries to strike a balance between domestic and foreign investment.

References

Aldabbous, M. (2013). Entry mode Methods for Foreign Direct Investment to Kuwait. Saarbrücken: LAP LAMBERT Academic Publishing.

Arestis, P., Baddeley, M., & McCombie, J. (2007). Economic growth. Cheltenham, UK: Edward Elgar.

Cohen, S. (2007). Multinational corporations and foreign direct investment. Oxford: Oxford University Press.

Driffield, N., & Jones, C. (2013). Impact of FDI, ODA and Migrant Remittances on Economic Growth in Developing Countries: A Systems Approach. Eur J Dev Res, 25(2), 173-196. http://dx.doi.org/10.1057/ejdr.2013.1

FAO.,. (2012). Trends And Impacts Of Foreign Investment In Developing Country Agriculture. Evidence From Case Studies. Rome: FAO.

Ṣabrī, N. (2008). Financial markets and institutions in the Arab economy. New York: Nova Science Publishers.

 
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