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

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
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