On the Determinants of Foreign Capital Flows - DAAD partnership ...

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value of LFDI has an impact on the past value of LGDP, LINV, LOPEN or LRER. The change in LFDI on the other hand does not cause productivity to change. After interpretation of results with LFDI as independent term, it is imperative to know if bilateral, unilateral or no causality at all is present in data. From the above, it can be inferred that the past values of LGDP, LOPEN, LPRO and LRER are all causing the change in LFDI. LINV on contrary does not cause the past values of foreign inflows. The ECT represents the proportion by which a long-run disequilibrium in FDI can be corrected each year and it is statistically significant at 5%level. This coefficient adds force to the interpretation to the long run relationships between the variables. With the coefficient estimated at -0.856 to three decimal places, p-value being less than 0.05 and it carrying a negative sign, a highly significant long run association implying a very high speed of adjustment of LFDI after a shock is noted. Approximately, 86% of the disequilibria of the previous year’s shock converge back to the long run equilibrium in the current year- more simply; it takes about 1 year and 2 months to correct disequilibrium in Mauritian FDI flows. Summarizing interpretations above, such a result can be deduced for the short-run: 1. LFDI and LGDP: Bidirectional Causality 2. LFDI and LOPEN: Bidirectional Causality 3. LFDI and LINV: Unilateral causality with LFDI causing LINV 4. LFDI and LPRO: Unilateral causality with LPRO causing LFDI 5. LFDI and LRER: Bidirectional causality The actual results coincide with the expected results in the research methodology except for domestic investment where it was expected that there would be bidirectional causality. However, this deviation will be shortly explained in the interpretation part. 24
ESTIMATION OF THE LONG RUN RELATIONSHIP The beta coefficients are studied to compare the relative strength and relationship of the various predictors within the model in the long run. It can be noted that the strongest relationship is between LFDI and LRER where with one standard deviation increase in LRER leading to a 2.923 decrease in predicted LFDI, with other variables held constant or preferably, while LGDP has the lowest impact with its beta being the lowest, hence reenforcing the short run results of the previous multiple regression. Inference of causality aspect on the Mauritian economy With respect to the above findings, the causality between variables can greatly help policy making in Mauritius. Knowing about the short run and long run relationships between variables enable those who are drafting incentives in attracting FDI to know which measures will promote such type of investment. Since LGDP and LFDI have bidirectional causality, the Mauritian government can go for both attractiveness of investment while promoting economic growth in the country. Trade liberalization has become an important concept for developing nations such as Mauritius and it is important to note that when opening the country more towards trade, there are better prospects for investors from abroad to invest in the island. As for real exchange rate, its stability will surely promote inward foreign investment. With other relationships depicted in table 5.7, it can also be noted that encouraging productivity will promote growth which in turn impact on the level of FDI. Nevertheless, the fact that domestic investment and foreign inflows present only unidirectional causality can be explained by the fact that in Mauritius, domestic investment and foreign investment are taken as substitutes. When foreign inflows are considerable in the country, private investors tend to respond to FDI inflows by increasing their investment as 25
Page 1 and 2: On the Determinants of Foreign Capi
Page 3 and 4: the theoretical framework and empir
Page 5 and 6: 3.1 MOTIVES BEHIND FDI Literature o
Page 7 and 8: Closely related, FDI can be taken a
Page 9 and 10: with the idea that inward FDI is a
Page 11 and 12: literature itself is ambiguous on t
Page 13 and 14: Investment. For the purpose of esti
Page 15 and 16: 0 100 200 300 400 FDI US 1970 1980
Page 17 and 18: Figure 5.3 Geographical distributio
Page 19 and 20: Dependent variable: LDFDI Table 5.4
Page 21 and 22: Inference from Multiple Regression
Page 23: LOPEN Yes 25.02 (0.0000) LINV No 2.
Page 27 and 28: From the findings and analysis, it
Page 29 and 30: Dunning J D. 1981. Explaining the I
Page 31 and 32: Kravis I B, Lipsey R. 1982. Locatio
Page 33 and 34: SACTRA (Standing Advisory Committee

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