Impact of foreign direct investment on the economic growth of Cyprus.Abstract Cyprus is one of the most attractive locations for foreign investment in the Mediterranean with its extensive network of double tax treaties and the mutual promotion and protection of investments. During the last decade, a number of financial incentives, as well as the Cypriot government's accession to the European Union European Union (EU), name given since the ratification (Nov., 1993) of the Treaty of European Union, or Maastricht Treaty, to the European Community (EU), have made the island a magnet for foreign investment. This study examines the relationship between economic growth as measured by GDP GDP (guanosine diphosphate): see guanine. per capita [Latin, By the heads or polls.] A term used in the Descent and Distribution of the estate of one who dies without a will. It means to share and share alike according to the number of individuals. and foreign direct investment for Cyprus using the method of Granger causality Granger causality is a technique for determining whether one time series is useful in forecasting another. Ordinarily, regressions reflect "mere" correlations, but Clive Granger, who won a Nobel Prize in Economics, argued that there is an interpretation of a set of tests as and vector auto regression (VAR). Evidence shows that there is a unidirectional The transfer or transmission of data in a channel in one direction only. Granger causation from foreign direct investment to economic growth. Key words: Granger causality, vector auto regression, economic growth. Ozet Kibris, yabanci yatirimcilara sagladigi vergi avantajlari ve tesvikleri nedeniyle Akdeniz'de yabanci yatirimlar icin en cekici yerlerden biridir. Gectigimiz on yilda bazi finansal tesviklerin yanisira Kibris Hukumeti'nin Avrupa Birligi'ne girisi, adayi bir yabanci yatirimlar merkezi haline getirmistir. Bu calisma kisi basina dusen GSMH GSMH Gayri Safi Milli Hasýla (Turkish: Gross National Product) ile olculen ekonomik kalkinma ve dogrudan yabanci yatirimlar arasindaki iliskiyi Granger nedensellik analizi ve vektor oto-regresyon metoduyla incelemektedir. Elde edilen sonuclar dogrudan yabanci yatirimlar ile ekonomik kalkinma arasinda tek yonlu Granger nedenselliginin mevcut oldugunu gostermektedir. Anahtar kelimeler: Granger nedensellik iliskisi, vektor oto-regresyon, ekonomik kalkinma Introduction Since 1974, Cyprus has been divided de facto [Latin, In fact.] In fact, in deed, actually. This phrase is used to characterize an officer, a government, a past action, or a state of affairs that must be accepted for all practical purposes, but is illegal or illegitimate. into two states: the Greek Cypriot "Republic of Cyprus" and the Turkish Cypriot "Turkish Republic of Northern Cyprus" (TRNC TRNC Turkish Republic of Northern Cyprus ). The Republic of Cyprus is recognized internationally and has been a full member of the European Union since 1 May 2004. The TRNC is recognized only by Turkey and its economy is handicapped by the international political and economic isolation of the country, as well as by the lack of private and governmental investment. The country's economy is dependent on the financial aid supplied by Turkey. The Republic of Cyprus (hereafter In the future. The term hereafter is always used to indicate a future time—to the exclusion of both the past and present—in legal documents, statutes, and other similar papers. referred to as "Cyprus") is one of the most attractive locations for foreign investment in the Mediterranean with its extensive network of double tax treaties and the mutual promotion and protection of investments. During the last decade, financial incentives and the Cypriot government's accession to the European Union have helped make the island a magnet for foreign investment. These incentives include unrestricted dividend transfers, a corporate income tax as low as 4.25%, full tax exemption tax exemption, immunity from the requirement of paying taxes. Federal, state, and usually local law provide exemption from taxation for a wide variety of organizations, usually not-for-profit, such as churches, colleges, universities, health care providers, various on profits of offshore partnerships, tax deductions Tax deduction An expense that a taxpayer is allowed to deduct from taxable income. tax deduction See deduction. on all expenses incurred for the earning of income, and full capital gains tax exemption. In addition, free trade zones and various other incentives including a ten-year tax exemption for the manufacturing of new products, investment discounts, duty free status in the free industrial zones and reduced taxation for foreign experts employed there, have also been introduced by the Cypriot government. In Cyprus, the constitution guarantees the right of private property and does not discriminate between Cypriots and non-Cypriots. Administrative procedures are simple and, in most cases, foreign participation of up to 100% is permitted. As shown in Figure I, Foreign Direct Investment (FDI FDI See: Foreign direct investment ) in Cyprus has shown a steady increase especially after 2000 when the country liberalized all foreign direct investment controls on local businesses for residents of the European Union. EU residents may now own 100% of local companies and any company listed on the Cyprus Stock Exchange The Cyprus Stock Exchange or CSE (Greek: Χρηματιστήριο Αξιών Κύπρου or ΧΑΚ) is a stock exchange located in Nicosia, Cyprus. . Ventures are also actively encouraged. Personal incentives, such as low personal taxation, exemption from social insurance and the defense tax, as well as duty free status, have also played a role in making the island a center of attraction for foreign investors. The inflow of approved FDI reached $1.22 billion in 2004, compared with $1.00 billion in 2003, and $1.06 billion in 2002. [FIGURE 1 OMITTED] On 1 October 2004, the Government of Cyprus lifted most investment restrictions concerning non-EU residents, completing earlier reforms (introduced in January 2000) concerning EU investors. Through this decision, it also abolished most capital restrictions and limits on foreign equity participation/ownership, thereby granting national treatment to foreign investors. Non-EU investors may now invest freely in Cyprus in most sectors, either directly or indirectly, including all types of portfolio investment on the Cyprus Stock Exchange. The only exceptions concern primarily the acquisition of property and, to a lesser extent, restrictions on investment in the sectors of tertiary education Tertiary education, also referred to as third-stage, third level education, or higher education, is the educational level following the completion of a school providing a secondary education, such as a high school, secondary school, or gymnasium. and mass media. Figure II shows distribution of FDI in terms of geographical origin as of 2003. It is noteworthy that a large portion of FDI originates from the European Union. This can be attributed to the removal of restrictions applicable to European Union nationals wishing to invest in Cyprus. [FIGURE 2 OMITTED] As can be seen in Figure II, 41% of new investments in 2003 originated from the EU; 21% originated from other European countries; 2% from the United States of America UNITED STATES OF AMERICA. The name of this country. The United States, now thirty-one in number, are Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, New Hampshire, and Australia, 8% from Middle East, and the remaining 28% from various other countries. As shown in Figure III, the allocation of FDI by sector as of 2003 was as follows: manufacturing 2%; construction 0.8%; trading 37%; hotels and restaurants 0.2%; transport and communications 11.1%; finance 1%; real estate and business 41.0%, other services 6.7%. [FIGURE 3 OMITTED] The success of Cyprus in attracting FDI, as well as the adoption of a market oriented economic system and the pursuance of sound macroeconomic mac·ro·ec·o·nom·ics n. (used with a sing. verb) The study of the overall aspects and workings of a national economy, such as income, output, and the interrelationship among diverse economic sectors. policies by the government, has placed the country among the high-income countries, with a per capita income Noun 1. per capita income - the total national income divided by the number of people in the nation income - the financial gain (earned or unearned) accruing over a given period of time of 17,847 US dollars, and an unemployment rate of 3.1% in 2003. Cyprus has a standard of living that is higher than many European Union member-states and the performance of the economy compares favorably with that of most EU countries. As of 2003, Cyprus held 16th place worldwide in terms of per capita income. The average annual rate of growth in the past five years was about 3.8%, total FDI was 211.9 million CYP CYP In currencies, this is the abbreviation for the Cyprus Pound. Notes: The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. , whereas inflation and unemployment stood at 2.9% and 3.4%, respectively. The explosion of growth in FDI during the 1990's, especially in developing countries, has inspired a stream of literature focusing on the impact of FDI on the dynamics of growth measured by GDP in the recipient country. However, to the best of our knowledge, no study has been done to examine the existence and nature of any causal relationship between FDI and GDP in Cyprus. The present study aims at filling this gap in the literature. The study covers only the Greek Cypriot state The Greek Cypriot State was to have been one of the constituent states of the United Cyprus Republic proposed by the failed 2004 Annan Plan for Cyprus aimed at reunification of Cyprus. of the "Republic of Cyprus" and includes no data from the TRNC as the latter has been unable to contribute to the island's becoming a magnet for FDI due to its international political isolation. Analysis of the nexus between FDI and GDP for the TRNC would be the topic of a separate study and is beyond the scope of the present study. The rest of the article is structured as follows. The next section provides a brief review of the literature. Section III presents the data used and method followed. Section IV provides the results and discusses the findings. The last section concludes the study. Literature Review The nexus between FDI and economic growth has generated a voluminous empirical literature focusing on both industrial and developing countries. One of the recent investigations, Chakraborty and Basu (2002), examined the causality causality, in philosophy, the relationship between cause and effect. A distinction is often made between a cause that produces something new (e.g., a moth from a caterpillar) and one that produces a change in an existing substance (e.g. between FDI and output growth in India. (1) Utilizing annual data from 1974-1996, they found that the real GDP Real GDP This inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed in base-year prices. Often referred to as "constant-price", "inflation-corrected" GDP or "constant dollar GDP". in India is not Granger-caused by FDI and the causality runs more from real GDP to FDI. Wang explored what kinds of FDI are most likely to contribute significantly to economic growth. Using data from 12 Asian economies over the period of 1987-1997, she found that only FDI in the manufacturing sector has a significant and positive impact on economic growth and attributes this positive contribution to FDI's spillover spill·o·ver n. 1. The act or an instance of spilling over. 2. An amount or quantity spilled over. 3. A side effect arising from or as if from an unpredicted source: effects. (2) Ericsson and Irandoust examined the causal effects between FDI growth and output growth for the four OECD OECD: see Organization for Economic Cooperation and Development. countries applying a multi-country framework to data from Denmark, Finland, Norway and Sweden. (3) The authors failed to detect any causal relationship between FDI and output growth for Denmark and Finland. They suggested that the specific dynamics and nature of FDI entering these countries could be responsible for these no-causality results. De Mello attempted to find support for an FDI-led growth hypothesis when a time series analysis and a panel data estimation for a sample of 32 OECD and non- OECD countries covering the period 1970-1990 were made. (4) He estimated the impact of FDI on capital accumulation Most generally, the accumulation of capital refers simply to the gathering or amassment of objects of value; the increase in wealth; or the creation of wealth. Capital can be generally defined as assets invested for profit. and output growth in the recipient economy. Liu, et al. tested the existence of a long-run relationship among economic growth, foreign direct investment and trade in China. (5) Using a co-integration framework with quarterly data for exports, imports, FDI and growth from 1981 to 1997, the research found the existence of a bi-directional causal relationship among FDI, growth, and exports. It is beyond the scope of the present paper to review the vast literature on the FDI-growth relationship. (6) Materials and Methods The econometric e·con·o·met·rics n. (used with a sing. verb) Application of mathematical and statistical techniques to economics in the study of problems, the analysis of data, and the development and testing of theories and models. method first examines the stationarity properties of the univariate time series. The present study uses the Augmented Dickey-Fuller (ADF (1) (Application Development Facility) An IBM programmer-oriented mainframe application generator that runs under IMS. (2) (Automatic Document Feeder) A paper stacker that feeds one sheet of paper at a time into the unit. ) unit root test to examine the stationarity of the data series. (7) It consists of running a regression of the first difference of the series against the series lagged once, lagged difference terms, and optionally, a constant and a time trend. This can be expressed as: (1) [DELTA]yt = [beta]1yt-1 + [beta]2[DELTA]yt-1 + [beta]3[DELTA]yt-2 + [beta]4 + [beta]5t The test for a unit root is conducted on the coefficient of yt-1 in the regression. If the coefficient is significantly different from zero then the hypothesis that y contains a unit root is rejected. Rejection of the null hypothesis null hypothesis, n theoretical assumption that a given therapy will have results not statistically different from another treatment. null hypothesis, n implies stationarity. Secondly, time series have to be examined for cointegration. Cointegration analysis helps to identify long-run economic relationships between two or several variables and to avoid the risk of spurious regression. Cointegration analysis is important because if two nonstationary variables are co-integrated, a VAR model in the first difference is mis-specified due to the effect of a common trend. If a cointegration relationship is identified, the model should include residuals from the vectors (lagged one period) in the dynamic Vector Error Correcting Mechanism (VECM) system. In this stage, Johansen co-integration test is used to identify co-integrating relationship among the variables. (8) Within the Johansen multivariate The use of multiple variables in a forecasting model. co-integrating framework, the following system is estimated: (2) [DELTA][Z.sub.t] = [[GAMMA].sub.1][DELTA][Z.sub.t-1] + ... + [[GAMMA].sub.k-1] + [DELTA][Z.sub.t-k-1] + [PI][Z.sub.t-1] + [mu] + [[epsilon.sub.t]: t = 1, ..., T where, [DELTA] is the first difference operator, z denotes vector of variables, [[epsilon].sub.t] niid (0,[SIGMA]), [mu] is a drift parameter, and [PI] is a (p x p) matrix of the form [PI] = [alpha][beta]', where [alpha] and [beta] are both (p x r) matrices of full rank, with [beta] containing the r co-integrating relationships and [alpha] carrying the corresponding adjustment coefficients in each of the r vectors. The Johansen approach can be used to carry out Granger causality tests as well. In the Johansen framework the first step is the estimation of an unrestricted, closed pth order VAR in k variables. Johansen [7] suggested two tests statistics to determine the co-integration rank. The first of these is known as the trace statistic: (3) N { tracer([r.sub.0] / k) = -T k[summation summation n. the final argument of an attorney at the close of a trial in which he/she attempts to convince the judge and/or jury of the virtues of the client's case. (See: closing argument) over (i=[r.sub.o]+1)] ln(1 - [[lambda].sub.1] where, [[lambda].sub.1] are the estimated eigenvalues eigenvalues statistical term meaning latent root. [[lambda].sub.1] > [[lambda].sub.2] > [[lambda].sub.3] > ... > [[lambda].sub.k] and [r.sub.0] ranges from 0 to k-1 depending upon the stage in the sequence. This is the relevant test statistic for the null hypothesis r [less than or equal to] [r.sub.0] against the alternative r [greater than or equal to] [r.sub.0] + 1. The second test statistic is the maximum eigenvalue eigenvalue In mathematical analysis, one of a set of discrete values of a parameter, k, in an equation of the form Lx = kx. Such characteristic equations are particularly useful in solving differential equations, integral equations, and systems of test known as [lambda]max; we denote it as [lambda]max ([r.sub.0]). This is closely related to the trace statistic but arises from changing the alternative hypothesis alternative hypothesis Epidemiology A hypothesis to be adopted if a null hypothesis proves implausible, where exposure is linked to disease. See Hypothesis testing. Cf Null hypothesis. from r [greater than or equal to] [r.sub.0] + 1 to r = [r.sub.0] + 1. The idea is to try and improve the power of the test by limiting the alternative to a cointegration rank which is just one more than under the null hypothesis. (9) The [lambda]max test statistic is: (4) [lambda] max ([r.sub.0]) = -Tln(1-[[lambda].sub.i]) for I = [r.sub.0] + 1 The null hypothesis is: there are r cointegrating vectors, against the alternative of r + 1 co-integrating vectors. Johansen and Juselius indicated that the trace test might lack the power relative to the maximum eigenvalue test. Based on the power of the test, the maximum eigenvalue test statistic is often preferred. (10) According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. Granger, Y is said to "Granger-cause" X if and only if X is better predicted by using the past values of Y than by not doing so. The past values of X are used in either case. In short, if a scalar scalar, quantity or number possessing only sign and magnitude, e.g., the real numbers (see number), in contrast to vectors and tensors; scalars obey the rules of elementary algebra. Many physical quantities have scalar values, e.g. Y can help to forecast another scalar X, then we say that Y Granger-causes X. If Y causes X and X does not cause Y, it is said that uni-directional causality exists from Y to X. If Y does not cause X and X does not cause Y, then X and Y are statistically independent. If Y causes X and X causes Y, it is said that feedback exists between X and Y. Essentially, Granger's definition of causality is framed in terms of predictability. (11) To implement the Granger test, we assume a particular autoregressive lag length k (or p) and estimate Equation (5) and (6) by OLS OLS Ordinary Least Squares OLS Online Library System OLS Ottawa Linux Symposium OLS Operation Lifeline Sudan OLS Operational Linescan System OLS Online Service OLS Organizational Leadership and Supervision OLS On Line Support OLS Online System : (5) [MATHEMATICAL EXPRESSION A group of characters or symbols representing a quantity or an operation. See arithmetic expression. NOT REPRODUCIBLE IN ASCII ASCII or American Standard Code for Information Interchange, a set of codes used to represent letters, numbers, a few symbols, and control characters. Originally designed for teletype operations, it has found wide application in computers. ] (6) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] F test is carried out for the null hypothesis of no Granger causality [H.sub.0]: [b.sub.i1] = [b.sub.i2] = [??] = [b.sub.ik] = 0, i = 1,2. [H.sub.o] : [b.sub.i1] = [b.sub.ik] = 0, i = 1,2 where, F statistic is the Wald statistic for the null hypothesis. If the F statistic is greater than a certain critical value for an F distribution, then we reject the null hypothesis that Y does not Granger-cause X (equation (1)), which means Y Granger-causes X. (12) A time series with stable mean value and standard deviation In statistics, the average amount a number varies from the average number in a series of numbers. (statistics) standard deviation - (SD) A measure of the range of values in a set of numbers. is called a stationary series. If d differences have to be made to produce a stationary process In the mathematical sciences, a stationary process (or strict(ly) stationary process) is a stochastic process whose probability distribution at a fixed time or position is the same for all times or positions. , then it can be defined as integrated of order d. Engle and Granger state that if several variables are all I(d) series, their linear combination may be cointegrated, that is, their linear combination may be stationary. (13) Although the variables may drift away Verb 1. drift away - lose personal contact over time; "The two women, who had been roommates in college, drifted apart after they got married" drift apart from equilibrium for a while, economic forces may be expected to act so as to restore equilibrium; thus, they tend to move together in the long run irrespective of irrespective of prep. Without consideration of; regardless of. irrespective of preposition despite short run dynamics. The definition of the Granger causality is based on the hypothesis that X and Y are stationary or I(0) time series. Therefore, we can not apply the fundamental Granger method for variables of I(1). In the absence of cointegration vector, with I(I) series, valid results in Granger causality testing are obtained by simply first differentiating the VAR model. With cointegration variables, Granger causality will further require inclusion of an error term in the stationary model in order to capture the short term deviations of series from their long-term equilibrium path. Hassapis et al. show that in the absence of cointegration, the direction of causality can be decided upon via standard F-tests in the first differenced VAR. (14) The VAR in the first difference can be written as: (7) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (8) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] Results and Discussion The present study employs data that consists of annual observations spanning the period between 1978 and 2003. All data are obtained from the World Bank's WDI WDI World Development Indicators (World Bank) WDI William Davidson Institute WDI Walt Disney Imagineering WDI Wood Destroying Insect (home inspections) WDI Websphere Data Interchange WDI Wind Drift Indicator database and are transformed into logarithmic logarithmic pertaining to logarithm. logarithmic relationship when the logs of two variables plotted against each other create a straight line. returns in order to achieve mean-reverting relationships, and to make econometric testing procedures valid. FDI is net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock Voting stock The shares in a corporation that entitle the shareholder to vote. voting stock Stock for which the holder has the right to vote in the election of directors, in the appointment of auditors, or in other matters brought up at the ) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment Reinvestment Using dividends, interest and capital gains earned in an investment or mutual fund to purchase additional shares or units, rather than receiving the distributions in cash. 1. In terms of stocks, it is the reinvestment of dividends to purchase additional shares. of earnings, other long-term capital, and short-term capital as shown in the balance of payments. This series shows net inflows in the reporting economy. Data are in current U.S. dollars. GDP per capita, on the other hand, is gross domestic product divided by mid-year population. GDP is the sum of gross value added Value Added The enhancement a company gives its product or service before offering the product to customers. Notes: This can either increase the products price or value. by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated fab·ri·cate tr.v. fab·ri·cat·ed, fab·ri·cat·ing, fab·ri·cates 1. To make; create. 2. To construct by combining or assembling diverse, typically standardized parts: assets or for depletion and degradation of natural resources. Data are in constant U.S. dollars. Table 1 shows the results of the ADF unit root tests on levels and in first differences of the data. Strong evidence emerges that all the time series are I(1). Table 2 presents results from the Johansen co-integration test among the data sets. Neither maximum eigenvalue nor trace tests rejects the null hypothesis of no co-integration at the 5% level. The outcome of the Granger causality tests is shown in Table 3. The results of the Granger causality tests suggest that the null hypothesis of FDI does not Granger-cause GDP per capita is rejected in 1 and 2 year lags, at the 5% and the 10% levels respectively. On the other hand, the null hypothesis of GDP does not Granger-cause FDI is not rejected. This leads us to the conclusion that there is only a one-way casualty running from FDI to GDP. Conclusion The success of Cyprus in attracting FDI, as well as the adoption of a market oriented economic system and the pursuance of sound macroeconomic policies by the government, has placed the country in the 16th place worldwide in terms of per capita income. This study examines the relationship between foreign direct investment and GDP per capita in the economy of Cyprus Economy - overview: Economic affairs in Cyprus are dominated by the division of the country into the southern area controlled by the Cyprus Government and the northern Turkish Cypriot-administered area. , using the method of Granger causality and vector auto regression (VAR). Strong Evidence emerges that the economic growth as measured by GDP in Cyprus is Granger caused by the FDI. Results further suggest that Cyprus's capacity to progress on economic development will depend on the country's performance in attracting foreign capital. Endnotes (1) C. Chakraborty, C. and P. Basu, "Foreign Direct Investment and Growth in India: A Cointegration Approach," Applied Economics 34 (2002):1061-1073. (2) Wang, M., Manufacturing FDI and Economic Growth: Evidence from Asian Economies, Department of Economics, University of Oregon The University of Oregon is a public university located in Eugene, Oregon. The university was founded in 1876, graduating its first class two years later. The University of Oregon is one of 60 members of the Association of American Universities. Mimeo (2002). (3) Ericsson, J. and M. Irandoust, "On the Causality between Foreign Direct Investment and Output: A Comparative Study," The Intl. Trade J. 15 (2001): 122-132. (4) De Mello, L.R., "Foreign Direct Investment and Output: A Comparative Study," The Intl. Trade J. 15 (1997): 221-311. (5) Liu, X., P. Burridge, and P.J.N. Sinclair, "Relationships between Economic Growth, Foreign Direct Investment and Trade: Evidence from China," Applied Economics 34 (2002): 1433-1440. (6) The interested reader should refer to de Mello for a comprehensive survey of the link between FDI and growth. L. R. De Mello, "Foreign Direct Investment and Output: A Comparative Study," The Intl. Trade J. 15 (1997): 221-311; Idem., "Foreign Direct Investment-led Growth: Evidence from Time Series and Panel Data," Oxford Economic Papers 51 (1999): 133-151. (7) Dickey, D. A. and W. A. Fuller, "Distribution of the Estimators for Autoregressive Time Series with a Unit Root," J. Am. Statistical Assoc. 74 (1979): 123-144. (8) Johansen, S., "Statistical Analysis of Cointegrating Vectors," J. Economic Dynamic and Control 12 (1988): 231-54. (9) Ibid. (10) Johansen, S. and K. Juselius, "Maximum Likelihood Estimation and Inference on Cointegration with Applications for the Demand for Money," Oxford Bulletin of Economics and Statistics 52 (1990): 169-210. (11) Granger C., "Investigating Casual Relationship by Econometric Models Econometric models are used by economists to find standard relationships among aspects of the macroeconomy and use those relationships to predict the effects of certain events (like government policies) on inflation, unemployment, growth, etc. and Cross Spectral Methods Spectral methods are a class of techniques used in applied mathematics and scientific computing to numerically solve certain partial differential equations, often involving the use of the Fast Fourier Transform. ," Econometrica 37 (1969): 424-458. (12) Ibid. (13) Engle, A. and C. Granger, "Cointegration and Error Correction: Representation, Estimation and Testing," Econometrica 55 (1987): 251-76. (14) Hassapis, C., N. Pittis and K. Prodromidis, "Unit Roots and Granger Causality in the EMS Interest Rates: The German Dominance Hypothesis Revisited." J. Intl Money Finance 18 (1999): 47-73. Mete Feridum Cyprus International University
Table 1. Augmented Dickey-Fuller Unit Root Test Results
Test with an intercept
Levels 1st differences
FDI 1.7797 -5.6679
GDP 2.2245 -7.5444
CV *
(1%) -3.8573 -3.9203
CV
(5%) -3.0403 -3.0655
Test with an intercept and trend
Levels 1st differences
FDI 2.4756 -10.8890
GDP 2.7856 -7.6623
CV *
(1%) -4.5715 -4.6678
CV
(5%) -3.6908 -3.733
Test with no intercept or
trend
Levels 1st differences
FDI 0.2644 -6.7665
GDP 2.3674 -10.6579
CV *
(1%) -2.6997 -2.7175
CV
(5%) -1.9614 -1.9644
* McKinnon Critical Value
The lag length was determined using Schwartz Information Criteria
(SIC)
Table 2: Johansen cointegration test results
Trace 5% critical
Null hypothesis statistic value
r = 0 30.657 41.68
R < = 1 14.5698 24.75
Maximum
eigenvalue 5% critical
Null hypothesis statistic value
r = 0 19.3670 29.68
R < = 1 8.7198 23.41
r is the number of cointegrating vectors under the null hypothesis.
Table 3: Granger causality test results
F--Statistics
Null hypothesis Lag 1 Lag 2
FDI does not granger cause GDP per capita 8.12266 ** 5.87487 *
GDP per capita does not granger cause FDI 0.175447 1.89679
F--Statistics
Null hypothesis Lag 3 Lag 4
FDI does not granger cause GDP per capita 1.6546 0.2555
GDP per capita does not granger cause FDI 1.7887 0.8576
* Reject the null hypothesis at the 10% level.
** Reject the null hypothesis at the 5% level.
*** Reject the null hypothesis at the 1% level.
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