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68 QUANTIFICATION OF BENEFITS FROM ECONOMIC COOPERATION IN SOUTH ASIA of FDI. By providing protection, BITs are expected to promote FDI. Based on the above discussions, to estimate the impact of SAFTA on inward FDI into the region and into the member countries the equation estimated is as follows: Inward FDI it = α + β 1 Growth of domestic market it + β 2 Skill availability it + β 3 Labour Cost it + β 4 Tariffs vis-à-vis other SAFTA Members it + β Exports to 5 other SAFTA Members it + β 6 Imports from other SAFTA Members it + β 7 Degree of Openess it + β 8 Number of BITs signed it + β 9 Import of intermediate goods from SAARC it + β Export of intermediate goods from SAARC it 10 + ε. The data sources, definitions and expected signs of the variables are presented in Table 8.8. Empirical Results The results are presented in Table 8.9 in columns 1–3. An attempt is made to control the economic fundamentals of the host country. To avoid the problem of simultaneity between the explanatory variables and dependent variable (i.e. log FDI), economic fundamentals are lagged by one year. Second, the impact of inter-regional tariffs and bilateral investment agreements on inward FDI is analysed by using a panel data for seven member countries of SAFTA for the period 1980–2006. Listwise deletion is undertaken in the case of missing data. All results presented are corrected for autocorrelation and hetroscedasicity. The results show that the economic fundamentals of a SAFTA member country have a significant impact on inward FDI. Domestic market size, low cost of labour and availability of skills attract FDI from outside the region. Higher trade openness attracts higher FDI. Tariffs with respect to other SAFTA member countries has a negative impact which indicates that lowering of tariffs following SAFTA will attract FDI from outside the region into the region (Table 8.9, column 1) The coefficient indicates that the impact will be significant, i.e. 30% of the rise in inward FDI may be because of lowering of inter-regional tariffs. This indicates that SAFTA may encourage FDI inflows into the member countries and consequently into the region as a whole. The theoretical reason for this is, as discussed above, regional integration offers many advantages to the inward FDI. It lowers the risk of investments, provides Table 8.8 Variables Used, Data Sources, Definitions and Expected Signs Variables Definition Expected Sources of Data Sign Potential domestic market (Growth of Log of real gross domestic product + WDI 2007 domestic firms) Literacy rates (Skill availability) Log of secondary enrolment ratio + WDI, 2005 Efficiency wages (Labour cost) Log of labour cost/Labour productivity – UNIDO Degree of openness Log of ratio of sum of exports and imports/GDP + COMTRADE Tariffs vis-à-vis other SAFTA countries Log of weighted average of tariffs vis-à-vis other – TRAINS SAFTA countries Imports from other SAFTA member Log of imports from other SAFTA member – COMTRADE countries as a proportion of GDP countries as a proportion of GDP Exports to other SAFTA member countries Log of exports from other SAFTA member + COMTRADE as a proportion of GDP countries as a proportion of GDP Exports to other SAFTA Member countries Log of exports to other SAFTA Member countries + COMTRADE as a ratio of total exports as a ratio of total exports Imports from other SAFTA member Log of imports from other SAFTA member + COMTRADE countries as a ratio of total imports countries as a ratio of total imports Import of intermediate goods from SAARC Import of intermediate goods from SAARC as a – COMTRADE as a ratio of GDP ratio of GDP Export of intermediate goods from SAARC Export of intermediate goods from SAARC as a + COMTRADE as a ratio of GDP ratio of GDP Number of BITs signed Number of Bilateral Investment Treaties signed by a country in year t (accumulated over the years)
I MPACT OF SAFTA ON INWARD AND OUTWARD FOREIGN DIRECT INVESTMENTS 69 Table 8.9 Impact of Tariffs within SAARC on Inward FDI Dependent Variable: Log of FDI Variables (1) (2) (3) Market growth 0.20*** 0.39*** 0.45*** (2.42) (4.58) (4.86) Literacy rate 0.179** 0.11 0.15* (2.47) (1.39) (1.71) BITS 0.69*** 0.60*** 0.56*** (5.61) (4.62) (3.82) Efficiency wages –0.50*** –0.45*** –0.51*** (–3.43) (–2.87) (–2.99) Openness 0.14*** 0.37** – (2.38) (2.14) Weighted average of tariffs vis-à-vis other SAFTA –0.30* – – member countries (–1.79) Total exports to SAARC as a ratio of GDP – – 0.30** (1.94) Total imports from SAARC as a ratio of GDP – 0.39*** (2.52) Total exports to SAARC as a ratio of total exports –0.09 – (–0.76) Total imports of intermediate goods from SAARC 0.20** – as a ratio of total imports (2.15) Constant 24.7 101.7 20.5*** (1.00) (0.76) (94.52) Observations 133 182 182 Hausman statistic 2.84prob value: 0.82 2.38prob value: 0.12 2.28prob value: 0.89 Note: * significant at 1%; ** significant at 5%; and *** significant at 10%. access to larger market and provides the opportunity to reap economies of scale by locating in the least cost country and supplying to other member countries and it may also lead to product fragmentation, i.e. vertical FDI. To assess whether SAFTA will encourage vertical FDI or not, the impact of share of SAFTA member countries in imports of intermediate goods on inward FDI is examined. The results presented in Table 8.9 (column 2) show that the imports of intermediate goods in the host country have a significant impact on inward FDI. In other words, higher the probability of importing intermediate goods into the host country more attractive will be the destination for inward FDI. SAFTA may therefore encourage vertically-integrated FDI. However, share of SAFTA member countries in total exports of the destination country does not have any significant impact indicating that inward FDI may not necessarily be attracted to countries with higher exports to SAARC as a proportion of total exports. But, results presented in column 3 of Table 8.9 shows that total exports to SAARC as a ratio of GDP of a country may in have positive impact on inward FDI. SAFTA may therefore encourage vertically integrated FDI which may boost exports of the destination country. Apart from the trade-related variables the results show that Bilateral Investment Treaties (BITs) signed by the host country has a significant impact on inward FDI flows. This indicates that the extent to which the operations of FDI are facilitated in the host country may impact the decisions of foreign investors. CONCLUSION The results of the chapter show that SAFTA may not only lead to higher intra-regional trade but may also induce higher inflow of foreign direct investments into the region. The increasing linkages between trade and FDI may enforce higher FDI to flow into the region. Higher imports of intermediate goods into a country and higher exports from the country are found to significantly attract inward FDI which suggests that FDI into the region may be both market seeking as well as efficiency seeking. SAFTA may therefore encourage vertically integrated FDI into the region.
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QUANTIFICATION OF BENEFITS FROM ECO
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QUANTIFICATION OF BENEFITS FROM ECO
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Preface Our consultations with seni
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viii CONTENTS 7. Revenue and Welfar
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Executive Summary OBJECTIVE This st
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EXECUTIVE SUMMARY xiii Table 1 EAMA
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EXECUTIVE SUMMARY xv India A full S
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EXECUTIVE SUMMARY xvii indicates th
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EXECUTIVE SUMMARY xix ments on basi
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Part I BENEFITS FROM TRADE, INVESTM
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15 Prospects for the Telecommunicat
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APPENDICES
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Appendix 8 Intra SAARC FDI Collabor
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Appendix 11 Table A11.1 On an Emplo
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Appendix 12 Original Commitments/In
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Appendix 14 Table A14.1 Telecommuni
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Appendix 15 REFERENCE PAPER Scope T
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Bibliography Abelson, P. (1996),
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BIBLIOGRAPHY 241 Cuba (2002), Negot
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BIBLIOGRAPHY 243 (2004), Impacts of
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BIBLIOGRAPHY 245 Silva, Patricia an
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BIBLIOGRAPHY 247 (1998), Tourism Se
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