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

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ABSTRACT

This paper investigates the relationship between foreign direct investment (FDI) inflows, exchange rate, and economic growth of a developing country, and their effects on major economic activities in the nation. This paper examines macroeconomic activity variables of gross domestic product, fixed capital investment, employment ratio, retail trade turnover, industrial production, FDI inflows, and dollar exchange rate as a control variable. The macroeconomic activity statistics of ten calendar years (1997-2006) of Kazakhstan were analyzed by using a multivariate regression model with weighted least squares estimates.

The results indicate that FDI has a minimum or statistically insignificant impact on GDP growth of Kazakhstan. The paper argues that a resource-seeking FDI has a minimal effect on improving the economic growth of developing countries. In other words, the resource-seeking FDI might have a minimal effect on achieving economic growth and national competitiveness of host countries, but not as much as manufacturing-based FDI does. Finally, this paper suggest policymakers of Kazakhstan should consider strategic goals of FDI to maximize its benefits into the economy.

KEYWORDS: foreign direct investment, economic growth, gross domestic product, industrial production, exchange rate, retail trade turnover, employment, multinational enterprises, national competitiveness, Kazakhstan

INTRODUCTION

Porter (199Oa) 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 ( 1 99Oa, 1 99Ob) 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). …