A Co-integration and Causality Analysis of Highest FDI Recipient Asian Economies

Foreign direct investments (FDI) over the years have been observed as a principal factor supporting and accelerating economic growth of an economy. On a larger perspective, FDI is sensitive to the fluctuations in the economic variables and policies of a country. Thus, attracting FDI inflows into the country depends upon number of macroeconomic-, socioeconomic-, cultural-, political- and firm-specific issues. Most of the studies in this area have highlighted about attracting FDI inflows in economies through various determinants and its importance. However, there are limited studies that have looked at the long run relationship between FDI inflows of an economy with neighbouring economies. This study is an attempt to identify existence of long run relationship among top FDI attracting Asian economies and investigating whether FDI inflows of one economy could be influenced by FDI inflows of neighbouring economies. This hypothesis was investigated using the co-integration analysis in our research findings. For this purpose, yearly data on FDI inflows from 1985 to 2011is considered and the countries identified for the study include economies from East Asia (China), South Asia (India) and South East Asia (Singapore, Thailand, Malaysia). Co-integration and causality analysis is used in order to investigate the long-term co-integration and causality between FDI inflows of these economies. Augmented Dickey–Fuller test and Phillips–Perron test have been used to check the stationarity of the data, Johansen Co-integration Test is used for estimation of the long run relationship, and the study also examines causal linkages between the FDI inflows of these countries by applying the Granger causality test. The result of co-integration test statistics identified co-integration among these economies that implies existence of long-term relationship. © 2013, Springer Science+Business Media New York.