Volume 10, Issue 3 (March 2023), Pages: 26-36

----------------------------------------------

 Original Research Paper

 Effect of foreign direct investment on the economy of developing countries: Case of Latvia

 Author(s): 

 Svetlana Saksonova ^1, *, Natalia Konovalova ², Oksana Savchina ³

 Affiliation(s):

 ¹Finance and Accounting Department, Faculty of Business, Management and Economics, University of Latvia, Rīga, Latvia
 ²Economics and Finance Department, Faculty of Business and Economics, RISEBA University of Applied Sciences, Rīga, Latvia
 ³Department of Finance and Credit, Faculty of Economics, Peoples’ Friendship University of Russia (RUDN University), Russian Federation, Moscow, Russia

  Full Text - PDF          XML

 * Corresponding Author. 

  Corresponding author's ORCID profile: https://orcid.org/0000-0003-3635-9122

 Digital Object Identifier: 

 https://doi.org/10.21833/ijaas.2023.03.004

 Abstract:

The aim of this paper is to determine and evaluate the effect of FDI stock on the Gross Domestic Product per capita and on labor productivity per person, which would give an understanding of the causality of investment in the development of the country. Although foreign investment plays a positive role in the development of several countries, promoting competition, development of employment, and acquiring new knowledge, experience, and technologies, in other countries FDI does not bring significant changes. Summarizing the literature, the authors conclude that there are no unambiguous econometric results on the causal relationship between FDI and economic development in developing, developed, or transition economies, so the authors' research will provide additional insight into the interaction of transition economies with FDI. Within the framework of the conducted research, an adapted Granger causality testing methodology is applied, to find out whether there exists and in which direction a causal relationship can be observed between the income level of Latvian residents, labor productivity, and foreign direct investment. The results of the analysis, which are based on a special VAR compilation mechanism and a modified Wald test, show that foreign investment in Latvia has no causal relationship either with the level of welfare or with labor productivity. The authors conclude that in Latvia there is a correlation between the attraction of foreign investment to the service sectors and the lack of transfer of national knowledge, which is reflected in the lack of a causal relationship between FDI and the level of national income. The authors conclude that in order to improve the welfare level of Latvian residents, the able-bodied population should improve their productivity, aside from attracting additional foreign investment.

 © 2022 The Authors. Published by IASE.

 This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

 Keywords: Foreign direct investment, Economic growth, VAR, Granger causality

 Article History: Received 14 August 2022, Received in revised form 24 November 2022, Accepted 27 November 2022

 Acknowledgment 

No Acknowledgment.

 Compliance with ethical standards

 Conflict of interest: The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

 Citation:

 Saksonova S, Konovalova N, and Savchina O (2023). Effect of foreign direct investment on the economy of developing countries: Case of Latvia. International Journal of Advanced and Applied Sciences, 10(3): 26-36

 Permanent Link to this page

 Figures

 Fig. 1 Fig. 2 Fig. 3 

 Tables

 Table 1 Table 2 Table 3

----------------------------------------------    

 References (35)

1. Akaike H (1998). Autoregressive model fitting for control. In: Parzen E, Tanabe K, and Kitagawa G (Eds.), Selected papers of Hirotugu Akaike: 153-170. Springer, New York, USA. https://doi.org/10.1007/978-1-4612-1694-0_12   [Google Scholar]
2. Akkermans DH (2017). Net profit flow per country from 1980 to 2009: The long-term effects of foreign direct investment. PLOS ONE, 12(6): e0179244. https://doi.org/10.1371/journal.pone.0179244   [Google Scholar] PMid:28654644 PMCid:PMC5487018
3. Almfraji MA and Almsafir MK (2014). Foreign direct investment and economic growth literature review from 1994 to 2012. Procedia-Social and Behavioral Sciences, 129: 206-213. https://doi.org/10.1016/j.sbspro.2014.03.668   [Google Scholar]
4. Blomstrom M, Lipsey RE, and Zejan M (1992). What explains developing country growth? (No. w4132). National Bureau of Economic Research, Massachusetts, USA. https://doi.org/10.3386/w4132   [Google Scholar]
5. Braslina L, Batraga A, Legzdina A, Salkovska J, Kalkis H, Skiltere D, and Bormane S (2020). Barriers to the development of regional competitiveness in the context of regional economies-Eu, Latvia, Region Vidzeme case study. In the International Conference on Applied Human Factors and Ergonomics, Springer, California, USA: 3-10. https://doi.org/10.1007/978-3-030-50791-6_1   [Google Scholar]
6. Cernis R (2021). Effect of foreign direct investment on Latvian economy. M.Sc. Thesis, Latvijas Universitate, Rīga, Latvia.   [Google Scholar]
7. Desbordes R and Wei SJ (2017). The effects of financial development on foreign direct investment. Journal of Development Economics, 127: 153-168. https://doi.org/10.3386/w23309   [Google Scholar]
8. Dickey DA and Fuller WA (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica: Journal of the Econometric Society, 49(4): 1057-1072. https://doi.org/10.2307/1912517   [Google Scholar]
9. Engle RF (1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica: Journal of the Econometric Society, 50(4): 987-1007. https://doi.org/10.2307/1912773   [Google Scholar]
10. Feridun M and Sissoko Y (2011). Impact of FDI on economic development: A causality analysis for Singapore; 1976-2002. International Journal of Economic Sciences and Applied Research, 4(1): 7-17.   [Google Scholar]
11. Granger CW (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica: Journal of the Econometric Society, 37(3): 424-438. https://doi.org/10.2307/1912791   [Google Scholar]
12. Gulbis I (2017). Foreign direct investment and special economic zones in Latvia. In the Scientific Conference on Economics and Entrepreneurship, Riga Technical University, Rīga, Latvia.   [Google Scholar]
13. Hannan EJ and Quinn BG (1979). The determination of the order of an auto regression. Journal of the Royal Statistical Society: Series B (Methodological), 41(2): 190-195. https://doi.org/10.1111/j.2517-6161.1979.tb01072.x   [Google Scholar]
14. Irandoust JEM (2001). On the causality between foreign direct investment and output: A comparative study. The International Trade Journal, 15(1): 1-26. https://doi.org/10.1080/088539001300005431   [Google Scholar]
15. Johansen S (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12(2-3): 231-254. https://doi.org/10.1016/0165-1889(88)90041-3   [Google Scholar]
16. Johansen S and Juselius K (1990). Maximum likelihood estimation and inference on cointegration-With appucations to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2): 169-210. https://doi.org/10.1111/j.1468-0084.1990.mp52002003.x   [Google Scholar]
17. Konovalova N and Caplinska A (2020a). Approaches to evaluation of banks’ financial sustainability. In the International Conference on Reliability and Statistics in Transportation and Communication, Springer, Riga, Latvia: 758-768. https://doi.org/10.1007/978-3-030-68476-1_70   [Google Scholar]
18. Konovalova N and Caplinska A (2020b). Impact analysis of factors influencing bank capital management. Entrepreneurship and Sustainability Issues, 8(1): 484-495. https://doi.org/10.9770/jesi.2020.8.1(34)   [Google Scholar] PMCid:PMC2983660
19. Kwiatkowski D, Phillips PC, Schmidt P, and Shin Y (1992). Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? Journal of Econometrics, 54(1-3): 159-178. https://doi.org/10.1016/0304-4076(92)90104-Y   [Google Scholar]
20. Lütkepohl H (2005). New introduction to multiple time series analysis. Springer Science and Business Media, Heidlberg, Germany. https://doi.org/10.1007/978-3-540-27752-1   [Google Scholar]
21. Mikhaylova AA, Mikhaylov AS, and Savchina OV (2019). Macroeconomic dataset for comparative studies on coastal and inland regions in innovation space of Russia. Data in Brief, 27: 104640. https://doi.org/10.1016/j.dib.2019.104640   [Google Scholar] PMid:31687443 PMCid:PMC6820115
22. Prokopieva E (2019). Factors for the effective functioning of the regional insurance markets in Russia. Voprosy Economiki: 2019(10): 146-155. https://doi.org/10.32609/0042-8736-2019-10-146-155   [Google Scholar]
23. Revina I and Brekis E (2009). Foreign direct investment and economic growth in Latvia. In the Economic Science for Rural Development Conference Proceedings, Latvia University of Life Sciences and Technologies, Jelgava, Latvia, 2009(18): 142-149.   [Google Scholar]
24. Saksonova S (2014). Foreign direct investment attraction in the Baltic States. Verslas: Teorija ir Praktika, 15(2): 114-120. https://doi.org/10.3846/btp.2014.11   [Google Scholar]
25. Saksonova S and Koļeda O (2017). Evaluating the interrelationship between actions of Latvian commercial banks and Latvian economic growth. Procedia Engineering, 178: 123-130. https://doi.org/10.1016/j.proeng.2017.01.075   [Google Scholar]
26. Salkovska J, Batraga A, Braslina L, Skiltere D, Braslins G, Kalkis H, and Legzdina A (2019). Four conceptual perspectives of innovation components. In the International Conference on Applied Human Factors and Ergonomics, Springer, California, USA: 72-82. https://doi.org/10.1007/978-3-030-20154-8_7   [Google Scholar]
27. Samborskyi O, Isai O, Hnatenko I, Parkhomenko O, Rubezhanska V, and Yershova O (2020). Modeling of foreign direct investment impact on economic growth in a free market. Accounting, 6(5): 705-712. https://doi.org/10.5267/j.ac.2020.6.014   [Google Scholar]
28. Savchina OV, Savchina OV, Bobkov AL, and Sharashidze AZ (2016). On the state of the mortgage market in the Russian federation in the conditions of global economic crisis. Journal of Applied Economic Sciences, 11(6): 1096-1103.   [Google Scholar]
29. Schwarz G (1978). Estimating the dimension of a model. The Annals of Statistics, 6(2): 461–464. https://doi.org/10.1214/aos/1176344136   [Google Scholar]
30. Simionescu M (2016). The relation between economic growth and foreign direct investment during the economic crisis in the European Union. Zbornik Radova Ekonomskog Fakulteta u Rijeci: Časopis za Ekonomsku Teoriju i Praksu, 34(1): 187-213. https://doi.org/10.18045/zbefri.2016.1.187   [Google Scholar]
31. Sims CA (1980). Macroeconomics and reality. Econometrica: Journal of the Econometric Society, 48(1): 1-48. https://doi.org/10.2307/1912017   [Google Scholar]
32. Stack MM, Ravishankar G, and Pentecost E (2017). Foreign direct investment in the eastern European countries: Determinants and performance. Structural Change and Economic Dynamics, 41: 86-97. https://doi.org/10.1016/j.strueco.2017.04.005   [Google Scholar]
33. Titarenko D (2005). The influence of foreign direct investment on domestic investment processes in Latvia. Transport and Telecommunication, 7(1): 76-83.   [Google Scholar]
34. Toda HY and Yamamoto T (1995). Statistical inference in vector auto regressions with possibly integrated processes. Journal of Econometrics, 66(1-2): 225-250. https://doi.org/10.1016/0304-4076(94)01616-8   [Google Scholar]
35. Yamada H and Toda HY (1998). Inference in possibly integrated vector autoregressive models: Some finite sample evidence. Journal of Econometrics, 86(1): 55-95. https://doi.org/10.1016/S0304-4076(97)00109-7   [Google Scholar]