Capital Formation and Economic Growth in Mauritius

Capital Formation and Economic Growth in Mauritius: Does FDI matter?ICITI 2012 ISSN: 16941225Consistent with theory, FDI and public investment are I(0) since they represent the firstdifferenceof foreign and public capital stock, respectively. Regarding private investment theADF test confirms stationary status while the PP test confirms for I(1). In addition, strong timetrend is detected for variable edu, road, and m2. Therefore, based on the unit root test presentedabove it is confirmed that all selected variables are I(d), where 0 ≤ d ≤ 1, i.e. decision columnshows status for each variable. Thus, warranting adoption of the ARDL procedure, whichrequires all variables included in a model to be either I(0) or I(1).Correlation matrixA correlation matrix is constructed to detect co-movements and nature of relationships betweenvariables, as per table 6. Both private investment and FDI are positively associated with realincome per capita, while the reverse is true for public investment. Similarly, positive relationshipis found between FDI and private investment, and negative association exists between FDI andpublic investment. Regarding, control variables very strong correlation is established betweenedu, m2, road, and tradeserv. Thus, problems of multi-collinearity may arise if these variablesare concurrently included in the model. To verify the severity of collinearity among the variablesthe variance inflation factor technique is explored.19