Impact of Foreign Direct Investment on Economic Growth in Afghanistan

Our study includes four variables GDP which is the dependant variable, whilst the independent variables are FDI, export (EX) and official development assistance (ODA). The following table (4.1) unfolds the descriptive statistics for all those variables; it shows the Mean, Median, Maximum, Minimum and Standard Deviation. We can note that the mean of the GDP is equal 8.7512 USD with the standard deviation equal 1.1753 USD therefore the mean of FDI is equal 18.8318 USD with standard deviation 1.6227 USD which is acceptable, while the mean of export is 7.

9698USD with standard deviation 1.0420USD and finally the mean of ODA is equal 5.3571 USD with the standard deviation 1.5599 USD. In the relative of this issue bellow panel only the mean of explanatory variables against dependent variable is considered, the explanation of Median, Maximum, Minimum and standard deviation are not necessary for this study. Therefore mean of ODA, export and FDI respectively are higher related to mean of economic growth. It means that however the mean of explanatory variables are bigger so it more effective regarding to others.

Measurement of Data

We use real GDP as dependent variable and the others such as FDI, export and official development assistance (ODA) are being used as explanatory variables, hence the data are panel cover the period from 1997 to 2012 and is taken from the World Bank. All the data are measured in million US Dollars. The following graph (4.1) shows the distribution of US Dollars over the afore-mentioned years. One thing should be mentioned that all the dependent and independents variables are transferred logarithm (log)

Discussion

As the results show that there is a significant and positive contribution between FDI and economic growth. As the theoretical empirical researcher expose in the past and present time that the linkage between FDI and economic growth are positive in the rest of world. Therefore relatively the connection of other independent variables such as exports and ODA reveal a positive sign against economic growth. As the economist believe capital inflow boost the economic situation, therefore not only FDI is caused of capital inflow respectively export and ODA also counted as a capital inflow, either become cause of capital inflow inward countries. in this case the effect of FDI inflow, exports and ODA assistance together contribute the economy suppose when the level of FDI inflow increase lot of economic opportunities are created, in another word if the amount of exports raise the productivity of exporter countries increase and too much capital stocks propel to produce a lot to be exported, and also for official development assistance the same case when poor governments are donated by world credible institution like world bank, or world development bank, by precise management of official authorities of receiver countries, they can build the essential infrastructures in the countries.

Conclusion and Recommendation

In the present time mobility of FDI capital stock from industrial countries is exposed to be an enormous contribution to the host, flows of capital stock as FDI can strengthen the stability of economy, where endowment of capital in the countries creates jobs, reduce unemployment, prevent from brain drain, increase the competition of domestic firms and finally the spillover Foreign capital stocks enhance the economic growth. Capital stocks shortage encounter the developing countries the developing countries, whilst it’s a big challenge for the economy to cross from these obstacles it’s better to open the doors of economy to be absorbed the FDI inflow to reach the economic boom by doing openness in the rest of an economy. In the relative case this paper investigates the impact of foreign direct investment (FDI) on economic growth in Afghanistan. The panel data was collected from World Bank website. It covers periods between 1997- 2012.

The ordinary least square (OLS) method has been applied in model to analyse the panel data, while the estimated models are fixed effect and random effect model. Firstly the fixed effect and random effect were run to show which one is the appropriate result, therefore in continuation the Hausman test was applied to disclose which one of these models are suitable for output. Hence the Hausman test point out that fixed effect is more appropriate for analysing the data. Lastly the results exposed that connection between FDI and economic growth are strongly positive and significant, thereby the other explanatory variables such as export and official development assistance are also positive and significant. Hence this study paper declares that not only FDI has a positive sign on GDP, but also export and ODA parallel have robust effect on GDP growth in four Central Asian countries.

POLICY IMPLICATION

Mostly after switching from socialism to market oriented economic system gradually the economic situation have propelled to economic welfare in this case, these four Central Asian countries decided to welcome the strategic investors around the world to inward countries because hosting of foreign investments mobilize capital stocks. The one thing where these countries approaching are FDI; in order to be invested on education, telecommunication, infrastructures, extraction of mining, mechanization of agriculture and technology one by one robustly effect on economic growth for example when the number of educated people are increased, however the number of educated people goes up, therefore the level of human resource become expert and skilful.

Altogether these four central Asian countries have to strengthen their interregional and interrelationship cooperation among each other to offset the upcoming obstacles challenges, in the relative of this issue when they apply this policy a lot of FDIs are absorbed, so increasing of FDIs directly affect on the level of exports. Therefore it can be claimed that when the amount of export rose, the production of firm increase by doing so the recruitments and hiring of firms absolutely amplified too. For that reason these four central Asian countries would be witness of extraordinary welfare in the economic growth. 

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