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Foreign Direct Investment, Financial Development and Economic Growth

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The present document analyzes the importance of the financial development on economic growth, in transferring the technological diffusion embroiled in foreign direct investment (FDI) inflow on the Ecuadorian economy from 1977 to 2010.

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Foreign Direct Investment, Financial Development and Economic Growth

  1. 1. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Foreign Direct Investment, Financial Development and Growth: The case of Ecuador Mario Alvaracn Paula School of Graduate Studies Universidad Carlos Tercero de Madrid September, 2014 Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador
  2. 2. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Outline 1 Introduction The causal relationship between Financial Development and Economic Growth Why is this study important? 2 Literature Review Financial Development and Growth FDI, Financial Development and Growth 3 Theoretical Framework: (Hermes Lensink, 2003 Growth Model with Technological Change 4 Data and Context Selection of Variables and De
  3. 3. nition Putting in Context 5 Methodology Bound Test Approach Estimated Model 6 Results Stationarity Test Estimation Output 7 Conclusions Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador
  4. 4. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions The causal relationship between Financial Development and Economic Why is this study important? The causal relationship between Financial Development and Economic Growth Schumpeter (1911): Well-functioning Banks are able to identify entrepreneurs that allow funds to be channeled to the most promising investment projects. Eciency Robinson (1952): Economic Growth creates demand for
  5. 5. nancial services, thereby existence of
  6. 6. nancial development. Levine et al. (2000): Exogenous components of
  7. 7. nancial intermediary development are positively associated with Economic Growth. FinancialDevelopment = EconomicGrowth. Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador
  8. 8. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions The causal relationship between Financial Development and Economic Why is this study important? Why is this study important? Neoclasical growth model states that developing countries will experience rapid convergence with developed countries, once they have access to state of the art technologies. But, developing countries cant assume the cost, so FDI is important. Explore the long run relationship between FDI and economic growth, watching if the development of
  9. 9. nancial sector helps to capture the absorptive capacity to FDI in ows toward real output expansions. This study aims to observe if
  10. 10. nancial sector development act as an ecient mechanism when transferring the bene
  11. 11. ts embroiled in FDI in ows to enhance economic growth. Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador
  12. 12. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Financial Development and Growth FDI, Financial Development and Growth Financial Development and Growth Nexus established in Levine (1997), role of
  13. 13. nancial system Acemoglu and Zilibotti (1997): Financial development pretends to make markets become less incomplete; capital accumulation is associated with an increase in the volume of
  14. 14. nancial intermediation and services Rioja and Valev (2003): Relationship may vary according to the level of
  15. 15. nancial development. Russeau and Wachtel (2011): Countries that has experienced
  16. 16. nancial crisis episodes may not have a clear
  17. 17. nance-growth relationship. Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador
  18. 18. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Financial Development and Growth FDI, Financial Development and Growth FDI, Financial Development and Growth Hermes and Lensink (2003): The development of the
  19. 19. nancial system of the recipient country is an important precondition for FDI to have a positive impact on economic growth. Ecient allocation of resources. Alfaro et al. (2004): The level of development of local
  20. 20. nancial markets is crucial to canalize the positive eects of FDI. The link between FDI and growth is causal, where FDI promotes growth through
  21. 21. nancial markets. Many authors conclude that well developed
  22. 22. nancial markets promote higher economic growth by absorbing the bene
  23. 23. ts embodied in the foreign capital ows, especially FDI Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador
  24. 24. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Growth Model with Technological Change The Model Constant rate of return Where represents the cost in research and development, L is the labor supply, A indicates the level of technology, measures capitals share of income or the proportion of capital income. Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador
  25. 25. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Growth Model with Technological Change The Model FDI is introduced in the model by assuming that there are
  26. 26. xed maintenance costs, equal to 1, and
  27. 27. xed set up costs in . The cost of (research and development) depends on FDI, explicitly the higher FDI in ow leads to a decline in the innovation costs. Innovation cost function = f (F) Where F = FDI , and /F 0 Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador
  28. 28. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Growth Model with Technological Change The Model The level of technology (A) is a function of the development of the
  29. 29. nancial sector (H), A = h(H), where A=H 0. Constant rate of return Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador
  30. 30. Introduction Literature Review Theoretical Framework: (Hermes Lensink, 2003 Data and Context Methodology Results Conclusions Growth Model with Technological Change The Model Households maximize a standard inter-temporal utility function, subject to the budget constraint. This gives the well-known Euler condition for the consumption growth rate gC = (1=)(r

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