An empirical study of the relationship between Foreign Direct Investments, Remittances, Political Stability and Economic Growth in Greece
Keywords:
FDI; remittances; political stability; Gross Fixed Capital Formation (GFCF); inflation; economic growth (GDP); Johansen test; bounds testing approach; VECM; ARDL; Granger-causality
Abstract
This study attempts to shed light on the relationship between FDI, remittances, Gross Fixed Capital Formation, political stability, inflation and economic growth for the case of Greece, using time-series data of annual frequency, covering the period from 1980 to 2018; the end date is the last year before the COVID-19 and the 2022 Russian Invasion of Ukraine which caused a structural break on the data set. After establishing that the investigated variables are stationary in level or in their differences, and once the Johansen test and the residuals based approach to cointegration are employed in capturing the cointegrating relations between them, we proceed with a robust VEC model and an ARDL with cointegration bounds, depending on the level of integration of the time series, to capture both the short-run and the long-run dynamics. The overall findings of both models are jointly analyzed, revealing that according to the ARDL model, FDI and economic growth are positively related in the short-run, but negatively related in the long-run. Moreover, the model indicates a negative short- and long-run relationship between remittances and economic growth, as well as a positive link between political stability and economic growth in Greece, as expected. The negative short-run relationship between remittances and economic growth is further supported by the VECM. Finally, both the VECM and ARDL indicate that GFCF and economic growth are positively related in the short-run, while the ARDL model reveals that this relationship exists in the long-run too.
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References
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7. Ahmad, M. S., Szczepankiewicz, E. I., Yonghong, D., Ullah, F., Ullah, I., & Loopesco, W. E. (2022) Does Chinese foreign direct investment (FDI) stimulate economic growth in Pakistan? An application of the autoregressive distributed lag (ARDL bounds) testing approach. Energies, 15(6), 2050.
8. Belloumi, M., and Touati, K. (2022) Do FDI inflows and ICT affect economic growth? An evidence from Arab countries. Sustainability, 14(10), 6293.
9. Hill, H. and Athukorala, P. (1998) Foreign Investment in East Asia. Asia-Pacific Economic Literature, 12(2), p. 23-50.
10. Chow, G., C., (2017) Capital formation and economic growth in China, The Quarterly Journal of Economics, 108(3) (pp. 809-842).
11. Tsitouras, A., Mitrakos, P., Tsimpida, C., Vlachos V. and Bitzenis A. (2019) An Investigation into the Causal Links Among FDI Determinants: Empirical Evidence from Greece. Journal of East-West Business, p. 1–39.
12. UNCTAD (2009) The Role of International Investment Agreements in Attracting Foreign Direct Investment to Developing Countries. UNCTAD Series on International Investment Policies for Development. United Nations, New York and Geneva.
13. Estrin, S. and Meyer, K. E. (2008) Foreign Direct Investment in Transition Economies: Strengthening the Gains from Integration. Published Proceedings of United Nations Conference. Genève, United Nations.
14. Svetličič, M. (2019) Theoretical context of outward foreign direct investment from transition economies. In Facilitating Transition by Internationalization (pp. 3-16). Routledge.
15. Antonietti, R., and Mondolo, J. (2023) Inward FDI and the quality of domestic institutions: A crosscountry panel VAR analysis. Economic Systems, 101078.
16. Subasat, T., and Bellos, S. (2013) Governance and foreign direct investment in Latin America: A panel gravity model approach. Latin american journal of economics, 50(1), p. 107-131.
17. Golitsis, P., Avdiu, K. and Szamosi, L. T. (2018) Remittances and FDI Effects on Economic Growth: A VECM and GIRFs for the Case of Albania. Journal of East-West Business, 24(3), p. 188–211.
18. Bellos, S., (2019) Military expenditure, economic growth and development in transition economies: A panel VAR GMM approach”, Applied Economics Quarterly, 65(3), p. 139-187.
19. Nadeem, A. M., Ali, T., Khan, M. T., and Guo, Z. (2020). Relationship between inward FDI and environmental degradation for Pakistan: an exploration of pollution haven hypothesis through ARDL approach. Environmental Science and Pollution Research, 27, 15407-15425.
20. Meivitawanli, B. (2021). Research on the relationship between provincial foreign direct investment and economic growth: An empirical study in Indonesia. Journal of International Studies, 14(1), 241257.
21. Behera, P., and Sethi, N. (2022) Nexus between environment regulation, FDI, and green technology innovation in OECD countries. Environmental Science and Pollution Research, 29(35), 52940-52953.
22. Arcand, J-L, Berkes, E., and U. Panizza. (2012) Too Much Finance? IMF Working Paper 12/161, Washington, D.C.: International Monetary Fund, June.
23. Sahay, R. et al. (2015) Rethinking Financial Deepening: Stability and Growth in Emerging Markets, IMF Staff Discussion Note, SDN/15/08, Washington, D.C.: IMF, May.
24. Kuvshinov, D., and Zimmermann, K. (2022) The big bang: Stock market capitalization in the long run. Journal of Financial Economics, 145(2), p. 527-552.
25. Khan, M. M. and Akbar, M. I. (2013) The impact of political risk on foreign direct investment. International Journal of Economics and Finance, 5(8), p. 1-16.
26. Kox, H. L. and Rojas-Romagosa, H. (2019) Gravity estimations with FDI bilateral data: Potential FDI effects of deep preferential trade agreements. Robert Schuman Centre for Advanced Studies Research Paper No. RSCAS, 70.
27. Zhan, J. X. (2020) Covid-19 and investment-an UNCTAD research round-up of the international pandemic's effect on FDI flows and policy. Transnational Corporations, 27(1), p. 1-3.
28. UNCTAD (2019) Global FDI flows continue their slide in 2018. Investments Trends Monitor 31. UNCTAD United Nations, New York and Geneva.
29. Lorfing, P. A. (2021) Screening of foreign direct investment and the states’ security interests in light of the OECD, UNCTAD and other international guidelines. Public Actors in International Investment Law, 179.
30. Baek, K. and Qian, X. (2011) An analysis on political risks and the flow of foreign direct investment in developing and industrialized economies. Economics, Management and Financial Markets, 6(4), p. 60-71.
31. Meyer, D. F. and Habanabakize, T. (2018) An analysis of the relationship between foreign direct investment (FDI), political risk and economic growth in South Africa. Business & Economic Horizons, 14(4), p. 777–788.
32. Zhang, J., and Fu, X. (2008) FDI and environmental regulations in China. Journal of the Asia Pacific Economy, 13(3), p. 332-353.
33. Raza, A. and Dwivedi, M. (2017). Regulatory Framework of Minerals and Mining Industry in India in relation to Environmental Concerns: A Critical Analysis. Available at SSRN 3415706, 128-143.
34. Zameer, H., Yasmeen, H., Zafar, M. W., Waheed, A., and Sinha, A. (2020) Analyzing the association between innovation, economic growth, and environment: divulging the importance of FDI and trade openness in India. Environmental Science and Pollution Research, 27, 2953929553.
35. Busse, M. and Hefeker, C. (2007) Political risk, institutions and foreign direct investment. European Journal of Political Economy, 23(2), p. 397-415.
36. Grindle, M. S. (2004) Good enough governance: poverty reduction and reform in developing countries. Governance, 17(4), p. 525-548.
37. UNCTAD (2018) Global FDI slipped further in 2017. Investments Trends Monitor 28. UNCTAD United Nations, New York and Geneva.
38. Enterprise Greece (2019) Foreign Direct Investment. [online]. Available from: https://www.enterprisegreece.gov.gr/en/greece-today/why-greece/foreign-direct-investment
39. Mouzakis, Y., and C. Odendahl (2021) How Greece can recover from Covid. Centre for European Reform, February 9. 2021.
40. Pelagidis, T. (2010) The Greek paradox of falling competitiveness and weak institutions in a high GDP growth rate context (1995–2008). London, UK: The Hellenic Observatory.
41. Bower, U., V. Michou, and C. Ungerer (2014) The puzzle of the Greek missing exports, European economy. Brussels, Belgium: European Commission.
42. Georgiou, C., L. P. Kyrgidou, F. Archontakis, and Petridou, E. (2015) The role of location as a selection criterion in FDI: The case of SMEs in Greece. Journal of East-West Business, 21 (3):233– 255. doi: 10.1080/10669868.2015.1058877.
43. Giakoulas, D., L. Vatikiotis, G. Thanopoulos, and Daskalakis, N. (2019) IME GSEVEE annual report on SMEs 2019. Athens, Greece: IME GSEVEE.
44. Nikas, C. and King, R. (2005) Economic Growth Through Remittances: Lessons from the Greek Experience of the 1960s Applicable to the Albanian Case. Journal of Southern Europe and the Balkans, 7(2), p. 235-257.
45. Barajas, A., Gapen, M.T., Chami, R., Montiel, P., and Fullenkamp, C. (2009) Do workers' remittances promote economic growth?. IMF Stuff Paper, 52(1), p. 55-82.
46. World Bank (2019; 2023) World Development Indicators. [online]. Available from: https://databank.worldbank.org/data/reports.aspx?source=world-development-indicators#
47. Higgins, M. and Klitgaard, T. (2011) Saving Imbalances and the Euro Area Sovereign Debt Crisis. Current Issues in Economics and Finance. Federal Reserve Bank of New York, 17(5).
48. Dritsakis, N., Varelas, E. and Adamopoulos, A. (2006) The Main Determinants of Economic Growth: An Empirical Investigation with Granger Causality Analysis for Greece. European Research Studies, 9(3–4), p. 47–58.
49. Roy, R., and Rahman, M. M. (2014) An empirical analysis of remittance–inflation relationship in Bangladesh: Post-floating exchange rate scenario. Working paper, WP/1403, Bangladesh Bank,
Chief Economist’s Unit, Bangladesh.
50. Kikerkova, I., Naumovska, E., Toshevska-Trpchevska, K. and Makrevska- Disoska, E. (2018) Vector Error Correction Model on FDI and Their Impact in the Republic of Macedonia. Zagreb International Review of Economics and Business, 21(2), p. 19–35.
51. Babalola, S. J. et al. (2019) Impact of Foreign Direct Investment, Aid and Trade on Economic Growth in Nigeria. Journal of Developing Areas, 53(4), p. 15–31.
52. Obradovic, S., Sapic, S., Furtula, S. and Lojanica, N. (2017) Linkages between Inflation and Economic Growth in Serbia: an ARDL Bounds Testing Approach. Engineering Economics, 28(4), p. 401–410.
53. Golitsis, P., Gkasis, P., and Bellos, S. K. (2022) Dynamic spillovers and linkages between gold, crude oil, S&P 500, and other economic and financial variables. Evidence from the USA. The North American Journal of Economics and Finance, 63, 101785.
54. Asari, F. F. A. H., Baharuddin N. S., Jusoh, N., Mohamad, Z., Shamsudin, N. and Jusoff, K. (2011) A vector error correction model (VECM) approach in explaining the relationship between interest rate and inflation towards exchange rate volatility in Malaysia. World Applied Sciences Journal, 12, p. 49-56.
55. Golitsis, P., Khudoykulov, K., & Palanov, S. (2022) Determinants of non-performing loans in North Macedonia. Cogent Business & Management, 9(1), 2140488.
56. Neaime, S. (2016) Financial Crises and Contagion Vulnerability of MENA Stock Markets. Emerging Markets Review, 27, p. 14–35.
57. Pesaran, M.H., Shin, Y. and Smith, R.J (2001) Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics, 16, p. 289-326.
58. Haug, A. (2002) Temporal aggregation and the power of cointegration tests: a Monte Carlo study. Oxford Bulletin of Economics and Statistics, 64, p. 399-412.
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Published
2023-03-30
Section
Banking and Finance
