Econometrics论文模板 – Modeling Long-term Relationship between Foreign Direct Investment and the Net Financial Account

Abstract

Growth and value are two fundamental approaches in financial situations. The study assessed the effect of the foreign direct investment on the net financial account using financial econometrics. Secondary data consisting of observations from 1970 to 2017 was gathered and subjected to statistical analysis techniques. The study adopted a quantitative research method. Further, the study employed a descriptive research design where the variables of interest were investigated without adjusting any of their values or environment. The study concluded that both the UK’s foreign direct investment and net financial account varied considerably between the year 1970 and year 2017. Also, it was revealed that there was a positive and significant relationship between the net financial accounts value and foreign direct investment.  Above all, the effect of the foreign direct investment on the net financial account was significant. 

Introduction

Economists have in many occasions used financial accounts to measure increases or decreases in international ownership of assets (Prasad, 2016). The owners of these assets can be government, businesses, individuals, or the Central Bank. Hence, the financial account presents a country’s balance of payment which helps economists to find out if the number f assets held increased or decreased although the value does not tell the total amount of assets currently held (Alcácer, Cantwell, & Piscitello, 2016). On the other hand, the foreign direct investments are an investment made by firms or individuals in one country into businesses of interest located in another country. Generally, economists have used foreign direct investment to tell the value invested by foreigners in a particular country (Liang, 2017). Often foreign direct investments are made in open economies offering a skilled workforce and above-average growth prospects for the investors and not in the economies that are tightly regulated (Chan, 2016).

Researchers have claimed that nations which focus more on increasing the foreign direct investments are likely to have positive balances of payment indicating that they have higher values of net financial accounts too. Verifying this claim is very important because governments and stakeholders will have sufficient facts to help them make informed decisions regarding support towards foreign direct investments.

Research Aim

The study aims to assess the effect of the foreign direct investment on the net financial account using financial econometrics. Financial econometrics is the application of statistical approaches to financial market data. 

Research Question

  • How is the effect of foreign direct investments on the net financial account?

Literature Review

Since inception, measurement of the net acquisition, as well as disposal of financial assets and liabilities of various countries, has been a central feature of international Monetary Fund operations (Dickinson, Wangerin, & Wild, 2016). However, a difference exists between transitional economies and emerging economies the net financial account which describes the net acquisition and disposal of financial assets and liabilities varies. Many researchers have attempted to explain this variation from different perspectives. Rognlie, (2016), for example, tried to describe variation in research on deciphering the fall and rise in the Net financial account to understand accumulation and scarcity variables. The researchers noted that, overall, the net financial account for many countries shows a gradual increase since 1948. Some of the factors believed to influence the fluctuations were the trade policies and foreign currency reserves. To support this assertion, another research by Leamer and Stern, (2017) claimed that country’s balance of trade which determined the net financial account value greatly was influenced significantly by all the factors that affected international trade. The major factors highlighted in this study included foreign currency reserves, trade policy, productivity, inflation, and demand. An important conclusion made in the study was that both goods and services were counted yielding a joint value of the balance of trade.

Similarly, researchers have highlighted numerous benefits of increased foreign direct investments of a country. In research by Iamsiraroj (2016) which attempted to investigate how foreign direct investments contributed to the growth of an economy, changes in the overall assets acquisition and liability disposal was considered as an important factor. The study observed that not only did direct effect on growth was expected from the foreign direct investment, but also influence on the level of the labor force, trade restrictions and friendly investment climate (Jones, & Kierzkowski, 2018). The researcher noted that several factors influence FDI into a country and stimulates economic growth through the inflows concerning the dynamic relationship between FDI and economic growth.

According to Vernon, (2017), a country is said to have a trade surplus if its exports are greater than its imports. Conversely, the country is said to have a deficit if the imports are greater than exports. In the same way, a country’s net financial account is positive if the value of acquired assets is higher than the value of acquired liabilities. For the companies, both assets and stocks can be bought by other companies in any part of the world. However, when a company’s assets are purchased instead of the stocks, it is said that asset acquisition has occurred (Feenstra, 2015). The asset acquisition strategy is an important undertaking which leads to the growth of an organization. 

Data

The study used secondary data from the World Bank Open Data official website. The website has a wide array of high-quality data covering several district collections and databases (Jauch, & Watzka, 2016). Nonetheless, the current study was interested in two variables with the UK’s data namely the net financial account and the foreign direct investment. 

The net financial account was the study’s dependent variable. It presented the net acquisition as well as the disposal of financial assets and liabilities (Scheubel, & Stracca, 2016). The variable was used to measure the financing of the net lending to borrowing that was made from nonresidents and was conceptually equated to the sum of the balance on the current and capital accounts. The variable was expressed in current values of U.S. dollars.

Foreign direct investment was the study’s independent variable. The variable represented the net inflows of investments that were received with the aim of acquiring a lasting management interest which was believed to be at least 10 percent of voting stock in enterprises operating in a country other than that of their investors (Agrawal, 2015). The values presented the sum of equity capital, earnings reinvestment, other long-term and short-term capital revealed by a balance of payments. The utilized source of data provided the total net FDI where, in BPM6, financial account balances were computed as the change in assets minus the change in liabilities. On the other hand, the Net FDI outflows were a description of assets while the net FDI inflows were a description of liabilities. Similarly, the variable was measured using the current value of U.S. dollars.

Methodology

The study adopted a quantitative research method where numerical data for the two study variables, FDI and net financial account were gathered, analyzed using statistical techniques and conclusions drawn from the analysis results (McKenny, Allison, Ketchen Jr, Short, & Ireland, 2017). The method was advantageous because it allowed the researcher to easily handle a large data set (McKenny et al., 2017) which cut across a wide period of between years 1970 and 2017 with the help of modern statistical tools.

On the other hand, the study employed a descriptive research design where the variables of interest were investigated without adjusting any of their values or environment to trigger a change in the other like it is the case with experimental designs (Friz, Gatheral, Gulisashvili, Jacquier, & Teichmann, 2015). The descriptive research design is advantageous because it provides results that present an accurate picture of the phenomenon since no adjustments were made to the variables (Friz et al, 2015).

The analysis of the data was done using modern statistical tools. To be specific, data screening, cleaning, and analysis were done using Microsoft Excel software. The researcher conducted a descriptive, time series, and inferential analysis. The descriptive analysis provided the general characteristics of the data by revealing the measures of central tendency, dispersion and distribution parameters (Carson, Crucifix, Preston, & Wilkinson, 2018, Zook, & Pearce, 2017). On the other hand, the time series analysis helped to reveal the nature of the trend depicted by the studied variables across time. Conversely, inferential statistics were used to describe the association between the two variables as well as the cause of effect relationship between them (Ng, Zhang, & TanciocoCyence 2016).

Empirical analysis and Findings   

Descriptive analysis results

The descriptive statistics revealed that the UK’s FDI averaged at 0.4847*10^10 with a standard deviation of 6.342. The high value of standard deviation implied that the foreign direct investments in the UK varied considerably over time. The high variation is also evidenced by the wide range of 37.427 with minimum and maximum values as -21.339 and 16.088 respectively. On the other hand, the coefficient of kurtosis was positive while that of skewness was negative implying that FDI data had a distribution that was highly peaked and skewed to the left. 

On the other hand, the descriptive statistics revealed that the UK’s net financial accounts value averaged at -3.64233*10^10 with a standard deviation of 5.053. Similarly, the high value of standard deviation implied that the net financial account values in the UK varied greatly over time. The high variation is also evidenced by the wide range of 16.96 with minimum and maximum values as -15.37 and 1.593 respectively. On the other hand, the coefficient of kurtosis was negative as well as that of skewness implying that the net financial data had a distribution that was lowly peaked and skewed to the left.

StatisticsFDI (*10^10)Net financial account (*10^10)
Mean/average0.484703-3.64233
Std E.0.915380.729326
Median value0.370481-1.69979
Std Dev6.3419425.052922
Sample Var40.2202325.53202
Kurtosis3.744416-0.07335
Skewness-0.89271-1.10133
Range37.4272416.96214
Min-21.3392-15.3695
Max16.088031.592632
Sum23.26574-174.832
Observations4848

The normal probability plot for the study’s dependent variable was used to assess whether the variable was normally distributed. The assessment was necessary since this was a requirement for the regression analysis which is presented later in this section. According to the plot, there were significant values above and below the mean even though those below the mean value were somehow more. The results implied that the variable was normally distributed but with slight skewness to the left.

Time series analysis results

The time series analysis of the two data variables revealed great similarities in the trends. First, the two variables showed a stagnating growth with less variation for the period 1970-1985. From the year 1985 to 2017, the two variables showed significant variations. However, in the long-run, the net financial accounts recorded a gradual decrease with the latest value being -8.481 in 2017. Conversely, the FDI showed an exponential increase for the period 1985-2000 before fluctuating significantly for the period 2000-2017.

Relationship analysis results

The relationship between the net financial accounts value and the foreign direct investment was expressed using a scatter plot diagram. According to the graph, the plotted points were positioned in an upward trend where the line of best fit had a positive gradient of 0.235. The figure implied that there was a positive association between foreign direct investment and the acquisition and disposal of financial assets and liabilities as expressed by the net financial account values. 

Regression analysis Results

The study used regression analysis technique to assess the effect of the foreign direct investment on the net financial accounts. The regression statistics summary produced values of multiple R and R-square equal to 0.295 and 0.087 respectively. The value of multiple R represented the coefficient of correlation and it implied that FDI and net financial account were moderately correlated with a coefficient of 0.294. On the other hand, the value of R-square represented the coefficient of determination. The value implied that the FDI explained 8.7% of the variations in the net financial accounts.

Regression Statistics
Multiple R value0.294982
R Squared value0.087014
Adjd. R Squared0.067167
Std E4.880278
N48

The overall effect of the model was assessed using the ANOVA technique. According to the analysis results, the computed F-value was equal to 4.384 with a significance F equal to 0.0418. The results showed that the computed F was greater than the critical F suggesting that test rejected the null hypothesis of non-effectiveness. Hence, a conclusion was made that the model was effective. In other words, the model fit was good.

ANOVA
 D fS SM SF-valueSignif. F
Regression1104.4177104.41774.3841460.041815
Residual461095.58723.81711
Total471200.005   

The exact effect of the FDI on the net financial account was assessed using coefficients analysis. The study obtained coefficient values equal to -3.75625 and 0.235 for the model intercept and FDI respectively. The values suggested that the equation representing the regression model was of the form,

y=-3.756+0.235x

Where y was the net financial account and x the UK’s FDI

The equation suggested that the net financial account was expected to increase by 0.235 units for a unit change in the foreign direct investment. The significance of the effect of the foreign direct investment on the net financial account was assessed using T-test technique. The computed value of T-statistic was equal to 2.0938 with a probability value of 0.0418. The probability value was less than 0.05, the set level of significance. Hence, the null hypothesis that the effect of FDI on the net financial account was insignificant was rejected. A conclusion was made that foreign direct investments significantly influenced the net financial accounts. 

 Coeffi.Std E’st-StatsPr-valuesL 95%U 95%
Intercept-3.756250.706505-5.316663.02E-06-5.17837-2.33413
FDI (*10^10)0.2350260.1122472.0938350.0418150.0090850.460967

Conclusions

Conclusions

The study concluded that both the UK’s foreign direct investment and net financial account varied greatly between the year 1970 and year 2017. The trends of the two data variables had great similarities. First, the two variables showed a stagnating growth with less variation for the period 1970-1985. From the year 1985 to 2017, the two variables showed significant variations. However, in the long-run, the net financial accounts recorded a gradual decrease with the latest value being -8.481 in 2017. Conversely, the FDI showed an exponential increase for the period 1985-2000 before fluctuating significantly for the period 2000-2017.

Further, the study concluded that there was a positive relationship between the net financial accounts value and foreign direct investment.  According to the study, FDI and net financial account were fairly correlated with a coefficient of 0.294. On the other hand, the value of FDI explained 8.7% of the variations in the net financial accounts.

According to the study, the effect of the foreign direct investment on the net financial account was significant. Specifically, the UK’s net financial account was expected to increase by 0.235 units for a unit change in the foreign direct investment.

Recommendations

The study recommended that governments and stakeholders should focus more on the FDI driving forces since an increase in the FDI was found to increase the net financial accounts. The government of UK and other governments across the world, through the ministry of education, should educate their citizens on the importance of increased foreign direct investment to ensure that every person is committed to improving the performance of foreign investments in their home country.

Further recommendations were made to future researchers. Apparently, the current study only assessed the effect of foreign direct investments on the net financial account. However, previous studies have revealed that the net financial account may be influenced by many other factors including trade policy, exchange rates, foreign currency reserves, inflation and demand among others (Quintal, Phau, Sims, & Cheah, 2016). Hence, the future researchers are recommended to use multivariate analysis techniques such s multivariate regression model analysis to assess the effect of these factors on the net financial accounts simultaneously.

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