For an
analysis of growth within or across countries the Augmented Solow model
developed by Mankiw...

Question

For an
analysis of growth within or across countries the Augmented Solow model
developed by Mankiw et al (1992), is capable of incorporatingfactors such as trade,
FDI, inequality, and a measure of institutional quality in addition to the core
variables of capital and labour, etc.

A: Select one
additional non-core variable and a country (or countries) of your choice and
set up your empirical model for investigating potential impact that the
variable may have on growth for the country/countries you have selected. Provide a theoretical and empirical
justification for the inclusion of the selected variable. 10%

B: Using the
World Bank World Development Indicators (WDI) download relevant time series
data for your model; make use of other internationally reputable sources to
complement your dataset if data are not available in the WDI. Conduct a preliminary analysis of your data
using relevant descriptive statistics techniques. 10%

C: Run
relevant regressions using Microfit. Present the output of your regression, comment
on the regression results generated and discuss their theoretical and empirical
validity. 20%

D: Discuss
the main problems that you may face conducting regression analysis (other than
non-stationarity), and by reference to your regression results, discuss whether
they suffer from any of these problems. Make
use of relevant diagnostic tests whenever appropriate. 20%

E: Identify
whether the variables in your model suffer from non-stationarity. Discuss the possible implication of
non-stationarity for your model and how this problem could be addressed. 20%

F: In the light of your findings under D and E
above, make any necessary changes to your model to correct for any of the
problems that you have identified.
Compare and contrast results generated here with those under C. To what extent are you confident about the
reliability of your result? What are the
policy implications from this analysis?

David · Accepted Answer

Analysis of effect of FDI on Growth on India                                                                  1
Analysis of effect of FDI on Growth in India
Analysis of effect of FDI on Growth on India                                                                  2
Introduction: 
Empirical model for investigating potential impact of Foreign Direct Investment on the 
growth for the country: 
We design a structural MRW-style, following Newhaus, 2005, and the method followed by 
Bassanini, Scarpella and Hemnnings(2001), where-in, we try to find the impact of FDI on 
economic growth, by substituting it in place of Human Capital. The reasons of ommitting Human 
Capital measure, used by MRW or Barrow and Lee‟s works, arises from two key observations: 
a. The incompleteness of the metrics used, i.e. the quality factor is missing more graduates 
in a country doesn‟t mean more employable graduates.
b. The strong Linear Correlation between the endogenous measures of tfp at time A, A(0) 
and MRW‟s estimates of H, which could be one reason ascribed to the „wrong signs‟ of H. 
In this part we will see that how FDI affects growth.  
FDI (Foreign Direct Investment) can be said as the foreign capital holdings in the economy (thus 
abstracting from qualitative issues that differentiate different kinds of FDI). 
So the production function, has two kinds of Capital, domestic and foreign with two 
different multipliers and the same Augmented Labor function. 
,
Taking log on both sides, and first differencing we have: 
  ( ( ))    ( (   ))      (  )     (  )  (     ) 
  
Plugging in steady state conditions from standard MRW framework, we have 
  ( ( ))    ( (  ))      ( (  ))      ( )    
 
     
     ( )  
+  
 
     

     
  (     )  (   )    ( )     (  )
Analysis of effect of FDI on Growth on India                                                                  3
So, our regression model becomes: 
, 
which is in Autoregressive, Distributed Lag  1 form. We choose India to illustrate this 
analysis. 
Advantages and Disadvantages of Choosing a particular Nation: 
The advantage of this is computational simplicity. We do away with a host of issues that separate 
the history of similar countries. We do not bother ourselves with controls, choice of optimal 
instruments, heterogeneity and outliers.  As a disadvantage, we cannot abstract, by identifying 
characteristics of countries that narrow down on the tight fit of estimates. 
World Bank Development Indicators: 
Using World Bank World development Indicators, we download data on GDP in constant LCU, 
which is available for all 3 countries, population growth. We use UNCTAD‟s data on FDI 
inflows, since figures on the same are not available in WDI. To see the distributed lag structure, 
we use plots. 
India
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
diff(lnGDP)
ln(vi)
ln(sd)
lnVi
ln FDI
Analysis of effect of FDI on Growth on India                                                                  4
Facts: 
Talking of trends, we note two interesting facts: 
a. Seasonality in all of the “exogenous” variables: Since the variables, are not 
exogenous, we would need to re-check for a state-space model. 
b. High Correlation between fluctuations in domestic savings, FDI and Vi‟s. This 
could be spurious, but suggests a deeper policy analysis, suspecting simultaneity bias, 
with additional proxies like Grant in Aid, for “reforms”, which is accordance with 
beliefs for at least India and China, but we will withhold this discussing till question, 
where-in we‟ll make concluding remarks. 
MRW 
MRW, is a structural model of empirical Analysis. By “structural”, we mean, we have a model 
through which we try to explain the relationship between the variables. Thus, we have already 
taken time lags, in A. Nevertheless, keeping the spirit of the questions, we do the following: 
a. Run an ols on a simple log-log model. [This would provide a useful 
benchmark]. 
lnY(i)=a*ln(FDI)+b*ln(sd)+c*ln(Vi)+ei 
b. Run our regression based on the model we have considered check for the 
robustness.
Analysis of effect of FDI on Growth on India                                                                  5
Run an OLS on a simple log-log model. 
INDIA
SUMMARY OUTPUT
         Regression Statistics 
       Multiple R 1 
       R Square 1
Adjusted R Square 
0.9655
17 
       Standard Error 0 
       Observations 32
         ANOVA
  df SS MS F 
Signific
ance F
Regression 3 
2.55491
1 
0.851
637 
#N
U
M! #NUM! 
   Residual 29 0 0
Total 32 
2.55491
1
Coeffi
cients 
Standar
d Error t Stat  
Lower 
95% 
Upper 
95% 
Lower 
95.0% 
Upper 
95.

For an analysis of growth within or across countries the Augmented Solow model developed by Mankiw et al (1992), is capable of incorporatingfactors such as trade, FDI, inequality, and a measure of...

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