Foreign Direct Investment, Exchange Rate, and Their Roles in Economic Growth of Developing Countries: Empirical Evidence from Kazakhstan

Article excerpt

INTRODUCTION

Porter (1990a) proposed the national competitiveness "diamond" model and applied this method to consider a wide range of reasons as to why some nations can gain competitive advantages in international markets. He presented four factors that determine the creation of a nation's competitive advantages: factor conditions, demand conditions, relevant and supporting industries, and firm strategy and structure. Porter further discussed the four stages of competitive development: factor-driven, investment-driven, innovation-driven, and wealth-driven stages. Consequently, countries pass through these four stages in creating competitive advantage of the nation and in enhancing economic prosperity. However, this model has been criticized due to the inapplicability of the model to small and developing economies, and its overlooking the roles of multinational enterprises (MNEs) and foreign direct investment (FDI). Professor Porter did acknowledge the fact that, at least for developing countries, foreign owned MNEs may serve to seed industrial clusters and thus contribute to the upgrading of the national diamond.

Nevertheless, the notion of national competitiveness is debatable (see Thompson, 2004). Porter (1990a, 1990b) argued that the national competitiveness of a nation may not rely on the whole economy, but in specific industries. Such understanding emphasizes the distinct strengths of individual industries in leading industrial countries and their corresponding arrangement of national clusters in these industries. These patterns of industry specialization are well illustrated by the business profiles of the United States, Japan, and Germany. The United States appears to be strong, primarily in high-technology industries, especially information technology, life sciences, and in a number of service industries such as management consulting, financial services, and motion pictures. Japan has been particularly strong in the design and complex assembly manufacturing of consumer electronics, cameras, photocopiers, machine tools, and cars. The competitive advantage of Germany is quite similar to that of the Japanese profile, although it is particularly strong in the areas of design, manufacture and distribution of a variety of industries such as machinery, cars, and chemicals.

A brief overview of the above industry-specific competitive advantages highlights the significance of the concept of national competitiveness, however, this national competitiveness concept can be seen to indicate that the performance of firms can be related back toward the national conditions within which these firms operate (see Caspar, 2000; Haake, 2002). Successful development of major industries can be achieved through national policies directed toward achieving a sustainable growth in national productivity and enhancing the competitiveness of the nation's industries (see Hohenthal, Johanson, & Johanson, 2003). Despite the high level of interest in the role of leading industries in building national competitiveness, it is still not very clear what major industries can help in leveraging national economies into the global marketplace.

With this in mind, Kazakhstan has captured the attention of the world with extraordinary speed, particularly in terms of its development in leading industries during the last decade. However, a large portion of economic growth of Kazakhstan was contributed by its natural resources--oil and gas industries and the mining sector. Indeed, the oil and gas sector is now Kazakhstan's biggest export category and a vital force behind the nation's economic growth. Nevertheless, it is debatable whether the oil and gas industry alone can provide long-term economic development for this economy. Consequently, due to the rise in wages, shortage of professional and skillful labour, problems in exploring sufficient Greenfields, pressures of environmental protection and insufficient infrastructure, Kazakhstan is now facing new challenges. …