Temporal Causality between Human Capital, Trade, FDI, and Economic Growth in Cointegrated Framework. Empirical Evidence from Pakistan
DOI:
https://doi.org/10.14666/2194-7759-9-1-004Keywords:
Trade, Human Capital, Economic Growth, Co-integration, Granger CausalityAbstract
We investigate causal links between human capital, foreign direct investment (FDI), trade openness, domestic investment, and economic growth for the case of Pakistan. In a multivariate vector autoregressive (VAR) framework, we apply Johansen and Juselius co-integration, Granger causality, and vector error correction model (VECM) using annual data from 1980 to 2017. Results of the co-integration analysis indicate the positive association among human capital, trade openness, foreign direct investment, and economic growth for the long run. Granger causality reveals that bidirectional causality exists between human capital and trade openness, human capital and economic growth, and foreign direct investment and trade openness. The unidirectional results of Granger causality analysis reveal that human capital and domestic investment influence economies growth through FDI, and trade openness influences economic growth through domestic investment. The most obvious finding to emerge from this empirical investigation is that human capital and trade openness enhance domestic and foreign investment, which leads to the economic growth of Pakistan.
Downloads
References
Abou-Stait F (2005) Are exports the Engine of Economic Growth? An application of cointegration and causality analysis for Egypt 1997-2003. African Development Bank. Economic Research working paper series. (76) July. https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/00363566-EN-ERWP-76.PDF
Agosin M R, Alvarez R, Bravo‐Ortega C (2012) Determinants of export diversification around the world: 1962–2000. The World Economy 35(3) 295-315. doi.org/10.1111/j.1467-9701.2011.01395.x
Alfaro L, Chanda A, Kalemli-Ozcan S, Sayek S (2004). FDI and economic growth: the role of local financial markets. Journal of international economics 64(1) 89-112.
Al-Yousif K (1997) Exports and economic growth: Some empirical evidence from the Arab Gulf Countries. Applied Economics 29(6): 693-697.
Azam M, Ahmed A M (2015) Role of human capital and foreign direct investment in promoting economic growth: evidence from Commonwealth of Independent States. International Journal of Social Economics 42(2): 98-111.
Balassa B (1978) Exports and economic growth: Further Evidence. Journal of Development Economics 5(2): 181-189.
Barro R J (1991) Economic Growth in a Cross-Section of Countries. Quarterly Journal of Economics 106(2): 407-43.
Barro R J, Sala-i-Martin X (1995) Economic Growth. McGraw-Hill, New York.
Benhabib J, Spiegel M M (1994) The role of human capital in economic development evidence from aggregate cross-country data. Journal of Monetary Economics 34(2): 143-173.
Berry C R, Glaeser E L (2005) The divergence of human capital levels across cities. Papers in regional science 84(3): 407-444.
Borensztein, E., De Gregorio J, Lee J W (1998) How Does Foreign Direct Investment Affect Economic Growth?. Journal of International Economics 45(1): 115–35.
Caballe J, Santos M S (1993) On endogenous growth with physical and human capital. Journal of Political Economy 101(6): 1042-1067.
Carkovic M, Levine R (2005) Does foreign direct investment accelerate economic growth?. Does foreign direct investment promote development 195.
Cavalcanti T V, Giannitsarou C (2017) Growth and human capital: a network approach. The Economic Journal 127(603): 1279-1317.
Chen P P, Gupta R (2009) An investigation of openness and economic growth using panel estimation. Indian Journal of Economics 89(355): 483.
Chuang Y C (2000) Human capital, exports, and economic growth: a causality analysis for Taiwan, 1952–1995. Review of International Economics 8(4): 712-720.
De Meulemeester J L, Rochat D (1995) A causality analysis of the link between higher education and economic development. Economics of Education Review 14(4): 351-361.
Doganlar M, Fisunoglu M (1999) Causality between exports and economic growth in Asian countries. Yapı Kredi Economic Review 10(11): 3-11.
Engelbrecht H J (2002) Human capital and international knowledge spill-overs in TFP growth of a sample of developing countries: an exploration of alternative approaches. Applied Economics 34(7): 831-841.
Engle R F, Granger C W (1987) Co-integration and error correction: representation, estimation, and testing. Econometrica: Journal of the Econometric Society. 251-276.
Evald M R, Klyver K, Christensen P R (2011) The effect of human capital, social capital, and perceptual values on nascent entrepreneurs’ export intentions. Journal of International Entrepreneurship 9(1): 1-19.
Feder G (1982) On exports and economic growth. Journal of Development Economics 12(1): 59-73.
Fields G S (1984) Employment, income distribution and economic growth in seven small open economies. The Economic Journal 94(373): 74-83.
Findlay R (1984) Growth and Development in Trade Models' in RW Jones and PB Kenen (eds), Handbook of International Economics.
Foster A D, Rosenzweig M R (1996) Technical change and human-capital returns and investments: evidence from the green revolution. The American Economic Review. 931-953.
Frankel J A, Romer D H (1999) Does trade cause growth? American Economic Review 89(3): 379-399.
Gemmell N (1996) Evaluating the impacts of human capital stocks and accumulation on economic growth: some new evidence. Oxford bulletin of economics and statistics 58(1): 9-28.
Ghazali A (2010) Analysing the relationship between foreign direct investment domestic investment and economic growth for Pakistan. International Research Journal of Finance and Economics 47(1): 123-131.
Gholami R, Tom Lee S Y, Heshmati A (2006) The causal relationship between information and communication technology and foreign direct investment. World Economy 29(1): 43-62.
Glomm G, Ravikumar B (1992) Public versus private investment in human capital: endogenous growth and income inequality. Journal of political economy 100(4): 818-834.
Grossman G H, Helpman E (1991) Innovation and Growth in the Global Economy. MIT Press, Cambridge.
Hanushek E A (2013) Economic growth in developing countries: The role of human capital. Economics of Education Review 37: 204-212.
Haq M, Luqman M (2014) The contribution of international trade to economic growth through human capital accumulation: Evidence from nine Asian countries. Cogent Economics & Finance 2(1): 947000.
Hermes N, Lensink R (2003) Foreign direct investment, financial development and economic growth. The Journal of Development Studies 40(1): 142-163.
In F, Doucouliagos C (1997) Human capital formation and US economic growth: a causality analysis. Applied Economics Letters 4(5): 329-331.
Johansen S, Juselius K (1992) Testing Structural Hypotheses in a Multivariate Cointegration Analysis of the PPP and the UIP for the UK. Journal of Econometrics 53(1-3): 211-244.
Kalaitzi A (2015) The causal relationship between exports and economic growth: time series analysis for UAE (1975-2012) (Doctoral dissertation, Manchester Metropolitan University).
Kalaitzi A S (2018) The Causal Effects of Trade and Technology Transfer on Human Capital and Economic Growth in the United Arab Emirates. Sustainability 10(5): 1535.
Kavoussi R M (1984) Export expansion and economic growth: Further empirical evidence. Journal of Development Economics 14(1): 241-250.
Khan S R, Shaw W D, Hussain F (1991) Causality between literacy and labour productivity in Pakistan. Economics of Education Review 10(3): 245-251.
Kim S (1995) Expansion of markets and the geographic distribution of economic activities: the trends in US regional manufacturing structure, 1860–1987. The Quarterly Journal of Economics 110(4): 881-908.
Koch M J, McGrath R G (1996) Improving labour productivity: Human resource management policies do matter. Strategic management journal 17(5): 335-354.
Li H, Liu Z, Rebelo I (1998) Testing the Neoclassical Theory of Economic Growth: Evidence from Chinese Provinces. Economics of Planning 31 2/3: 117–32.
Lim L K, McAleer M (2002) Economic Growth and Technological Catching Up by Singapore to the USA. Mathematics and Computers in Simulation 59: 1–3, 133–41.
Liu Z (2002) Foreign Direct Investment and Technology Spillover: Evidence from China. Journal of Comparative Economics 30 3: 579–602.
Maddala G S, Kim I M (1998) Unit roots, cointegration, and structural change (No. 4). Cambridge university press.
Makki S S, Somwaru A (2004) Impact of Foreign Direct Investment and Trade on Economic Growth: Evidence from Developing Countries. American Journal of Agricultural Economics 86 3: 795–801.
Makki S S, Somwaru A (2004) Impact of foreign direct investment and trade on economic growth: Evidence from developing countries. American Journal of Agricultural Economics 86(3): 795-801.
Marwah K, Klein L R (1998) Economic Growth and Productivity
Gains from Capital Inflow: Some Evidence for India. Journal of Quantitative Economics 14 1: 81–108.
Michaely M (1977) Exports and growth, An empirical investigation. Journal of Development Economics 4(1): 49-53.
Moudatsou A, Kyrkilis D (2011) FDI and Economic Growth: Causality for the EU and ASEAN. Journal of Economic Integration: 554-577.
Narayan P K, Smyth R (2004) Temporal causality between human capital and real income in cointegrated VAR processes: Empirical evidence from China, 1960-1999. International Journal of Business and Economics 3(1): 1.
Pissarides C A (1997) Learning by trading and returns to human capital in developing countries. The World Bank Economic Review 11(1): 17-32.
Ram R, Zhang K H (2002) Foreign direct investment and economic growth: Evidence from cross-country data for the 1990s.
Economic Development and Cultural Change 51(1): 205-215.
Ramirez M D (2000) Foreign Direct Investment in Mexico: A Cointegration Analysis. Journal of Development Studies 37 1: 138–62.
Rehman N U (2016) FDI and economic growth: empirical evidence from Pakistan. Journal of Economic and Administrative Sciences 32(1): 63-76.
Robert K W, Parris T M, Leiserowitz A A (2005) What is sustainable development? Goals, indicators, values, and practice. Environment: science and policy for sustainable development 47(3): 8-21.
Romer P M (1989) Human capital and growth: theory and evidence (No. w3173). National Bureau of Economic Research.
Sachs J D, Warner A M (1997) Sources of slow growth in African economies. Journal of African economies 6(3): 335-376.
Schultz T W (1961) Investment in human capital. The American economic review 51(1): 1-17.
Shahbaz M (2012) Does trade openness affect long-run growth? Cointegration, causality and forecast error variance decomposition tests for Pakistan. Economic Modelling 29(6): 2325-2339.
Strulik H (2005) The role of human capital and population growth in R&D‐based models of economic growth. Review of International
Economics 13(1): 129-145.
Sun H (1998) Macroeconomic Impact of Direct Foreign Investment in China: 1979–96. The World Economy 21 5: 675–94.
Tanna S, Topaiboul K (2005, June) Human capital, trade, FDI and economic growth in Thailand: what causes what?. In DEGIT Conference Papers with (No. c010_046).
Vohra R (2001) Export and economic growth: Further time-series evidence from less developed countries. International Advances in Economic Research 7(3): 345-350.
Vohra R (2001) Export and economic growth: Further time-series evidence from less-developed countries. International Advances in Economic Research 7(3): 345-350.
Wright M, Hmieleski K M, Siegel D S, Ensley M D (2007) The role of human capital in technological entrepreneurship. Entrepreneurship Theory and Practice 31(6): 791-806.
Young A (1993) Invention and bounded learning by doing. Journal of political economy 101(3): 443-472.
Youssef A, Paloni A, Noorbakhsh F (2017) Looking for Human Capital: Investment in Developing Countries. The Changing Patterns of Human Resource Management (pp. 104-120). Routledge.
Zafar A (2007) The growing relationship between China and Sub-Saharan Africa: Macroeconomic, trade, investment, and aid links. The World Bank Research Observer 22(1): 103-130.
Zhang K H, Markusen J R (1999) Vertical multinationals and host-country characteristics. Journal of Development Economics 59(2); 233-252.
Zulkifli S A M, Zulkifli N M H, Yusuf N H M, Eem C J (2018) Determinants of Human Capital Development: Case of Malaysia. e-Academia Journal 6(2).
Published
How to Cite
Issue
Section
The authors when submitting their papers endorse and give permission as well to the Publisher Transition Academia Press to publish the article/paper in print and/or electronic format. Article/paper is defined as the final, definitive, and citable Version of Record, and includes the accepted manuscript in its final form, including the abstract, text, bibliography, and all accompanying tables, illustrations, data.
If/when an article is accepted for publication, Author will be asked to transfer copyright of the article to Transition Academia Press. Transition Academia Press will retain copyright of all published material and reserves the right to re-use any such material in any print and/or electronic format. Author willing to retain their copyright from the Editors might request a fair condition, on the base of a bilateral agreement.
