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y
t
=
0
+
1
p
i
y
t-i
+
1
p
i
x
t-i
+
1
p
i
z
t-i
+
t
and testing the joint hypothesis H
0
:
1
=
2
=..
p = 0, and
1
=
2
=..
p
= 0 against H
1
:
..
0, and
1
2
..
y
t
=
0
+
1
t +
2
y
t-1
+
1
p
i
y
t-i
+ u
t
Where u
t
is the pure white noise error term, that adjusts the errors of autocorrelation and
independently and identically distributed.
y
t-i
= y
t-i
- y
t-i+1
.
y
t-i
expresses the first differences with p
lags. The coefficients
0
,
1
, and
i
are being estimated.
The ADF regression test for the existence of unit root of y
t
that represents all variables (in the
natural logarithmic form) at time t. The test for a unit root is conducted on the coefficient of y
t-1
in the
regression. If the coefficient is significantly different from zero (less than zero) then the hypothesis that
y contains a unit root is rejected. The null and alternative hypothesis for the existence of unit root in
variable y
t
is H
0
;
2
= 0 versus H
1
:
2
p
0. Rejection of the null hypothesis denotes stationarity in the
series.
6. Cointegration Tests
Having found that all the three variables in examination have unit roots (that is, they are integrated of
order one), our next step is to determine whether or not there exists at least one linear combination of
the non stationary variables that is integrated of order zero (I(0)).
Cointegration, an econometric property of time series variable, is a precondition for the
existence of a long run or equilibrium economic relationship between two or more variables having
unit roots (i.e. Integrated of order one). Two or more random variables are said to be cointegrated if
each of the series are themselves non stationary.
The results from the Cointegration analysis (see Table 8) show that when two lags are used, the
null hypothesis of no Cointegration (r=0) between LnEx, LnFDI and LnGDP is rejected at 5 per cent
level. This test may be regarded as a long run equilibrium relationship among the variables. The
purpose of the Cointegration tests is to determine whether a group of non stationary series is
cointegrated of not.
82 International Research Journal of Finance and Economics - Issue 42 (2010)
Cointegration test based on the Maximum Likelihood method of Johnsen (1979) suggests two
tests (the trace test and the Maximum eigenvalues test) statistics to determine the Cointegration rank.
7. Granger Causality
Table 9 provides the results of the long run relationship between FDI inflows, Exports and GDP for
India, the next logical step for our purpose is to examine the Granger Causal relationship among the
variables, x is said to Granger Cause y if and only if the forecast of y is improved by using the past
values of x together with the past values of y, then by not doing so (Granger 1969).
According to Granger causality test done by using annual data from 1970 to 2007 in India,
foreign direct investment (FDI) is not the causal exports. In other wards, there is causality relationship
from FDI inflows to exports. Economic growth (GDP) is not the cause of exports. In other words, there
is no causality relationship from economic growth to exports. Economic growth (GDP) is not the cause
of FDI. In other words there is no causality relationship from economic growth to FDIs.
8. Conclusion
This study examines the direction of the relationship between economic growth rate, FDI and Exports
by using Granger causality test. According to the results of the study, there is no reciprocal causality
relationship between these variables in India. The direction of causality relationship is from exports to
growth rate and there is no causality relationship from FDIs to exports. The directions of causality
relationship is from exports to growth rate and there is no causality relationship from growth rate to
exports, and the direction of causality relationship is from FDIs to growth rate and there is no causality
relationship from growth rates to FDIs.
In other words, FDI and exports in India is one of the factors affecting economic growth,
however, the high or low economic growth rate does not have an effect on the presence of FDIs and
exports in India.
International Research Journal of Finance and Economics - Issue 42 (2010) 83
Appendix-I
Table 1: Trends of FDI inflows, Exports, Imports and Balance of Payments in India.
(Millions of US Dollars)
Year
FDI
Inflows
A.G(in
per cent) Exports
A.G(in
per cent) Imports
A.G(in
per cent) BOP
Ex/Im(in
per cent)
1970 45 2026,4 2124,4 -98 95,38693
1971 48 5 2036,46 0,496447 2423,7 14,08868 -387,24 84,02278
1972 18 - 63 2447,94 20,20565 2223,24 -8,27083 224,7 110,1069
1973 38 113 2917,17 19,16836 3210,95 44,4266 -293,78 90,85068
1974 57 50 3926,4 34,5962 5135,88 59,94892 -1209,48 76,45038
1975 85 49 4355,12 10,91891 6380,66 24,23694 -2025,54 68,25501
1976 51 - 40 5548,79 27,40843 5664,95 -11,2169 -116,16 97,9495
1977 - 36 - 171 6378,2 14,94758 6646,63 17,32901 -268,43 95,96141
1978 18 - 150 6670,74 4,58656 7864,86 18,32854 -1194,12 84,81702
1979 49 168 7806,03 17,01895 9827,44 24,95378 -2021,41 79,43096
Average 45 1 4411,33 31,69 5150,27 40,29 -738,95 88,32315
1980 79 63 8585,54 9,985998 14864,4 51,25404 -6278,86 57,75908
1981 92 16 8295,3 -3,38057 15418,2 3,72568 -7122,9 53,802
1982 72 - 22 9357,88 12,80942 14786,1 -4,0997 -5428,22 63,28836
1983 6 - 92 9147,74 -2,24559 14060,7 -4,90596 -4912,96 65,05892
1984 19 241 9451,35 3,318962 15272,3 8,616925 -5820,95 61,88557
1985 106 451 9139,56 -3,29889 15928 4,293394 -6788,44 57,38046
1986 118 11 9398,96 2,838211 15421,1 -3,18245 -6022,14 60,9487
1987 212 80 11297,9 20,20372 16675,3 8,133013 -5377,4 67,7523
1988 91 - 57 13233,5 17,13239 19101,7 14,55086 -5868,2 69,27917
1989 252 176 15871,5 19,93426 20549,4 7,578907 -4677,9 77,23583
Average 105 24 10377,92 9,43 16207,72 4,25 -5829 63,43904
1990 237 - 6 17969,1 13,21614 23579,6 14,74593 -5610,5 76,20613
1991 75 - 68 17726,8 -1,34843 20447,8 -13,2818 -2721 86,69294
1992 252 236 19627,5 10,72218 23578,6 15,31118 -3951,1 83,24286
1993 532 111 21571,6 9,90498 22788,4 -3,35134 -1216,8 94,66044
1994 974 83 25021,8 15,99418 26842,7 17,79107 -1820,9 93,21641
1995 2 151 121 30630 22,41326 34706,9 29,29735 -4076,9 88,25334
1996 2 525 17 33105,1 8,08064 37942,2 9,321778 -4837,1 87,2514
1997 3 619 43 35008,1 5,748359 41431,9 9,197411 -6423,8 84,49552
1998 2 633 - 27 33437 -4,48782 42979,9 3,736252 -9542,9 77,79683
1999 2 168 - 18 35666,7 6,668361 46979,2 9,305047 -11312,5 75,92019
Average 1 517 91 26976,37 10,94 32127,72 11,03 -5151,35 84,77361
2000 3 585 65 42379,3 18,82036 51522,9 9,671727 -9143,6 82,25333
2001 5 472 53 43361,1 2,316697 50392,3 -2,19436 -7031,2 86,04707
2002 5 627 3 50372 16,16864 56516,8 12,15364 -6144,8 89,12748
2003 4 323 - 23 58962,9 17,05491 72557,7 28,38253 -13594,8 81,26346
2004 5 771 33 76648,6 29,99462 99775,4 37,5118 -23126,8 76,82114
2005 7 606 32 99619,6 29,96924 142842 43,16355 -43222,4 69,74111
2006 19 662 159 120861 21,32251 175242 22,6824 -54381 68,96806
2007 22 950 17 145431 20,32914 215500 22,9728 -70069 67,48538
Average 9 375 77,17 79704,44 34,74 108043,6 45,47 -28339,2 77,71338
Source: UNCTAD Statistics 2008, World Development Indicators CD ROM 2008.
Note: FDI= Foreign Direct Investment, A.G= Annual Growth Rate, BOP= Balance of Payment, Ex= Exports and Im=
Imports.
84 International Research Journal of Finance and Economics - Issue 42 (2010)
Appendix- II
Table 2: Results of Unit Root Test for Exports (Levels)
Null Hypthosis: LnEX has a unit root
Exogenous: Constant
Lag Length: 1 (Automatic based on SIC, MAXLAG=2)
Augmented Dickey Fuller test statistic t-statistic Probability*
-0.064521 0.9458
Test critical values: 1% level -3.626784
5% level -2.945842
10% level -2.611531
* MacKinnon (1996) one-sided p-values.
Table 3: Results of Unit Root Test for FDI (Levels)
Null Hypthosis: Ln FDI has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic based on SIC, MAXLAG=2)
Augmented Dickey Fuller test statistic t-statistic Probability*
-0.634777 0.8499
Test critical values: 1% level -3.632900
5% level -2.948404
10% level -2.612874
* MacKinnon (1996) one-sided p-values.
Table 4: Results of Unit Root Test for GDP (Levels)
Null Hypthosis: LnGDP has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic based on SIC, MAXLAG=2)
Augmented Dickey Fuller test statistic t-statistic Probability*
0.196228 0.9687
Test critical values: 1% level -3.621023
5% level -2.943427
10% level -2.610263
* MacKinnon (1996) one-sided p-values.
Table 5: Results of Unit Root Test for Exports (Differences)
Null Hypthosis: D (LNEX) has a unit root
Exogenous: Constant
Lag Length: 0(Automatic based on SIC, MAXLAG=2)
Augmented Dickey Fuller test statistic t-statistic Probability*
-4.215560 0.0021
Test critical values: 1% level -3.626784
5% level -2.945842
10% level -2.611531
* MacKinnon (1996) one-sided p-values.
International Research Journal of Finance and Economics - Issue 42 (2010) 85
Appendix- III
Table 6: Results of Unit Root Test for FDI (Differences)
Null Hypthosis: D (LNFDI) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic based on SIC, MAXLAG=2)
Augmented Dickey Fuller test statistic t-statistic Probability*
-6.110085 0.0000
Test critical values: 1% level -3.646342
5% level -2.954021
10% level -2.615817
* MacKinnon (1996) one-sided p-values.
Table 7: Results of Unit Root Test for GDP (Differences)
Null Hypthosis: D(LnGDP) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic based on SIC, MAXLAG=2)
Augmented Dickey Fuller test statistic t-statistic Probability*
-3.808292 0.0063
Test critical values: 1% level -3.626784
5% level -2.945842
10% level -2.611531
* MacKinnon (1996) one-sided p-values.
Table 8: Results of Cointegrating Relationships between Exports, FDI and GDP.
Hypothesed rank (r) Eigen value Likelihood ratio 5% critical value Probability
Race statistic for cointegrating rank
r=0 0.429783 21.54639 29.79707 0.3244
r 1 0.086908 3.009054 15.49471 0.9665
r2 0.000265 0.008752 3.841466 0.9251
Maximum Eigen value statistic for cointegrating rank
r=0 0.429783 18.53734 21.13162 0.1110
r1 0.086908 3.000302 14.26460 0.9467
r2 0.000265 0.008752 3.841466 0.9251
Mac-Eigen value test indicates no cointegration at the 0.05 level.
Table 9: Pair wise Granger Causality Tests.
Pairwise Garanger causality tests
Sample: 1970 2006
Lags 2
Null Hypothesis Obs F-statistic Prob
LNFDI does not Granger cause LNEX 33 2.26180 0.1229
LNEX does not Granger cause LNFDI 3.12072 0.0598
LNGDP does not Granger cause LNEX 35 0.26954 0.76550
LNEX does not Granger cause LNGDP 3.18567 .0552
LNGDP does not Granger cause LNFDI 33 1.53760 0.2325
LNEX does not Granger cause LNGDP 2.56760 0.0947
86 International Research Journal of Finance and Economics - Issue 42 (2010)
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