THE IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH IN CANADA ABSTRACT The study examines the determinants of economic growth in Canada over time, and finds out if there is any support for FDI-led growth hypothesis in Canada using simple regression analysis. To achieve this goal the study uses a model that is based on the Mankiw et al 1992 as theoretical foundation for the analysis in which they emphasized on human capital as an important variable for economic growth in addition FDI will be incorporated into their model as a variable capable of increasing physical capital as well as developing human capital and enhancing technological progress capable of stimulating economic growth. Using 11-year period of quarterly data. INTRODUCTION The rapid expansion of globalization marked by enhanced economic integration and trade liberalization has given rise to ever expanding investment around the world. The immense growth in the computer and telecommunications industries, and lowering of transportation costs has made it possible for each state of production to be located in any place that proves to be more conducive to efficiency. This situation has significantly increased the inflow of foreign direct investment (FDI) in the world which has risen to the second highest level ever recorded in 2006. As a result, developed countries, developing countries, and transition economies all experienced growth in FDI inflows. However, among developed nations. FDI in Canada plunged during the period of 2002 – 2004(which is not covered by our data set) in manufacturing sector due to attrition and maintained a stunted latency in terms of global share of FDI (huffingtonpost 2013;the globe and mail 2010). Although major concentration of these investment was on manufacturing its deterioration by 13 percent from 2009 to 2009 drove investors to mining and oil and gas which increased by 10 percent by 2000 to 2009. Also the finance and insurance industries was not left out by investors which witnessed an increase of 1.4 percent by 2009 to 2009. FDI shares in other Canadian sector either witnessed an increase of 1.9 percent or more to date. Proponent of FDI emphasized that host country benefit from capital spillovers (Morris, 2008, p. 4.). Local firms are bound to benefit from technological changes brought by foreign investors to host country (Görg and Greenaway 2002) via technological imitation by domestic investors, skill acquisition from advanced technological use by domestic workers which can enhance domestic human capital while Opponent of FDI argues of possible future repatriation of capital in monetary terms to country of foreign investor (Morris, 2008, p. 4). This could also lead to unfair market competition with local investors whom lack sufficient capital and manpower to purchase or make use of advanced technology brought in by foreign investors which can oust them from market (Görg and Greenaway (2002, pp. 2-3) OBJECTI.

1. THE IMPACT OF FOREIGN DIRECT INVESTMENT ON
ECONOMIC GROWTH IN CANADA
ABSTRACT
The study examines the determinants of economic growth in
Canada over time, and finds out if there is any support for FDI-
led growth hypothesis in Canada using simple regression
analysis. To achieve this goal the study uses a model that is
based on the Mankiw et al 1992 as theoretical foundation for the
analysis in which they emphasized on human capital as an
important variable for economic growth in addition FDI will be
incorporated into their model as a variable capable of increasing
physical capital as well as developing human capital and
enhancing technological progress capable of stimulating
economic growth. Using 11-year period of quarterly data.

2. INTRODUCTION
The rapid expansion of globalization marked by enhanced
economic integration and trade liberalization has given rise to
ever expanding investment around the world. The immense
growth in the computer and telecommunications industries, and
lowering of transportation costs has made it possible for each
state of production to be located in any place that proves to be
more conducive to efficiency. This situation has significantly
increased the inflow of foreign direct investment (FDI) in the
world which has risen to the second highest level ever recorded
in 2006. As a result, developed countries, developing countries,
and transition economies all experienced growth in FDI inflows.
However, among developed nations. FDI in Canada plunged
during the period of 2002 – 2004(which is not covered by our
data set) in manufacturing sector due to attrition and maintained
a stunted latency in terms of global share of FDI
(huffingtonpost 2013;the globe and mail 2010). Although major
concentration of these investment was on manufacturing its
deterioration by 13 percent from 2009 to 2009 drove investors
to mining and oil and gas which increased by 10 percent by
2000 to 2009. Also the finance and insurance industries was not
left out by investors which witnessed an increase of 1.4 percent

3. by 2009 to 2009. FDI shares in other Canadian sector either
witnessed an increase of 1.9 percent or more to date. Proponent
of FDI emphasized that host country benefit from capital
spillovers (Morris, 2008, p. 4.). Local firms are bound to
benefit from technological changes brought by foreign investors
to host country (Görg and Greenaway 2002) via technological
imitation by domestic investors, skill acquisition from advanced
technological use by domestic workers which can enhance
domestic human capital while Opponent of FDI argues of
possible future repatriation of capital in monetary terms to
country of foreign investor (Morris, 2008, p. 4). This could also
lead to unfair market competition with local investors whom
lack sufficient capital and manpower to purchase or make use of
advanced technology brought in by foreign investors which can
oust them from market (Görg and Greenaway (2002, pp. 2-3)
OBJECTIVES OF THE STUDY
The broad objective of this study is to examine the relationship
between FDI and growth in Canada. The study will also focus
on;
A. Explore theoretical foundations and empirical contribution of
other researchers
B. Employ empirical analysis to determine relationship between
FDI and growth
C. To proffer recommendations for enhancing FDI.
RESEARCH HYPOTHESIS
For the purpose of this research two hypothesis are been setup
such as the null hypothesis and alternative hypothesis.
· NULL HYPOTHESIS: Ho: FDI does not contribute to growth
in Canada.
· ALTERNATIVE HYPOTHESIS: H1: FDI positively
contributes to growth in Canada
SCOPE AND LIMITATION OF THE STUDY
The study is on the impact of FDI on economic growth in
Canada. The scope of this study covered the period 1901-2001.

4. The data used are publications from stats Canada(CANSIM)
The study is largely a secondary research and is limited by the
following;DATA PROBLEM:Data collected on human capital
represented by labor in real gross domestic product (GDP)
might not be an adequate measure for human capital. The period
covered was not wide enough to give an accurate result because
of period limitation from stats Canada. Most of the data
collected are not reliable because of easy manipulation for
political and economic reasons as such the conclusion differ and
whenever the data are not reliable the prediction based on it will
be unreliable.
TIME CONSTRIANT: the time given to conduct the research
and make conclusion might not be enough
DIFFICULTY IN COLLECTING DATA: the data been
secondary is difficult to get enough and required information
which can affect the result of my regression analysis
LITERATURE REVIEW
Studies range from proposing that there is a significant
relationship between FDI growth and GDP growth to suggesting
that there is not a significant relationship between these two
variables. In this section we review several of these studies and
present their conflicting results. Cave (1974) was probably the
first researcher to report empirical results about spillover effect
stemming from the presence of foreign firms in domestic
market. He used cross-sectional data for Canada and Australia

5. and found evidence of positive spillovers affecting domestic
firms and argue that FDI increases the productivity of host
nations’ resources by improving their allocation through
competition among firms and accelerates the transfer of
technology and innovation to domestic firms. Benhua Yang
(2007) conducts a similar study but ends up with conflicting
conclusions. This study also measures the effect of FDI on
economic growth by regressing economic growth on FDI
inflows as a percentage of GDP and other control variables.
However, unlike the previous study, the author lets the
coefficients for the explanatory variables differ for up to seven
different regions. Using panel data, the study employs a large
sample of nations and covers from 1973 to 2002 time-period,
with the data averaging over five year periods. First, a base
regression on all regions is estimated. The results show that the
coefficient on the FDI variable is positive but statistically
insignificant. Second, the effect of FDI on economic growth is
allowed to differ between OECD countries and developing
countries and between OECD countries and six other regions.
His results show that, unlike the previous study, the coefficient
associated with FDI for the OECD countries is positive and
significant. . Third, the data is divided into two fifteen-year
periods to see if the effect has changed over time. For the
OECD nations, he learns that the coefficient for the first period
(1973-1987) is negative and insignificant, but the coefficient for
the second period (1988-2002) is positive and significant.
Robert Lensink and Oliver Morrissey (2006) also examine the
relationship between FDI and economic growth; however, they
add another aspect to the analysis –volatility. Their analysis
indicates that there is not a significant relationship between FDI
and economic growth. As the review of empirical studies
indicates, most of the existing researches in the area of FDI are
very limited in their scope by examining only the impact of FDI
either on economic growth or on one of the variables that affect
economic growth. This is especially true in the case of Canada.
This research differs from the existing empirical studies by

6. taking a boarder approach, examining the causal relationship
between economic growth and its determinants in Canada.
METHODOLOGY
The study will make use of secondary data obtained from stats
Canada(CANSIM) from period of 1901-2001 in which simple
regression analysis will be conducted using Mankiw et al 1992
as theoretical foundation for the analysis they emphasized that
human capital is an important variable for economic growth as
such FDI will be incorporated into their model as a variable
capable of increasing physical capital, as well as developing
human capital and enhancing technological progress capable of
stimulating economic growth . Therefore coefficient of the
variables, R squared, F-statistic and t-values will be used to
check for robustness of the regression result

7. THEORETICAL CONSIDERATIONS
Neoclassicists assumed that capital is a function of the highest
risk adjusted rate of return. This assumption provided the main
theoretical framework that was used by postwar neoclassical
theory in the analysis of FDI. One of the main inferences of the
neoclassical growth theory is that all nations eventually will
approach the same level of productivity. The lack of evidence
that this might take place sparked the development of “new
growth theories” (see Grossman and Helpman, 1991). One of
the main features of these new theories is to make technology as
an endogenous variable. Additionally, according to new
theories, technology is considered to have both “private good”
characteristics and “public good” characteristics (Wakelin,
1997). This connotes that the gains of innovations can be
partially appropriated assuming that technological diffusion
occurs more easily within a nation than between nations, a
technological gap between nations persists. In another words,
no nation can completely depend on “imitation” to approach the
technological frontier (Lundvall, 1992). The traditional neo-
classical growth models postulate that long-run economic
growth arises from both technological progress and labor force
growth, which are both exogenously determined. In these
models, FDI is considered to only have a short-run effect on the
growth of output. However, the recent acceptance of
endogenous growth theory has promoted research into channels
through which FDI can be expected to encourage economic
growth in the long-run (Grossman and Helpman, 1991; Barro
and Sala-i-Martin, 1995). This has led to the prevailing view
that multinational corporations (MNCs) can complement the
local industry and stimulates growth and welfare in the host
nations. The merit of endogenous growth models is the
assumption that long-run growth is not affected by
technological changes alone, but also by institutional and

8. nation-specific factors. The host country’s economic
environment portrayed by its rate of economic growth, trade
policy, political stability, legislation, domestic market size, and
balance of payments constraints, can have significant impact on
FDI inflows. (Dunning, 1993, Caves, 1996, de Mello, 1996,
1997, 1999). Thus, the government of host country can
stimulate economic growth by devising policies that are more
conducive for FDI. Additionally, FDI may intensify
competition, altering the structure of imperfectly competitive
industries. This, in turn, may generate demand for local output,
stimulating supply industries. In various theoretical
frameworks, a lot of attention has been paid to technological
differences as the determinants of international competitiveness
and growth of advanced nations. Modern growth theories
accentuate the significance of innovative endeavors in the
context of imperfect competition models of trade and growth
(Grossman and Helpman, 1991). Dosi and his colleagues
introduced neotechnology or evolutionary approaches to
technological change and growth in 1990 (Dosi, G., Pavitt, K.,
and Soete, 1990). In their theoretical framework, absolute gaps
in technology are perceived to be more significant than
endowments-based comparative advantage in exemplifying trade
flow and growth. Traditionally, given the assumption of perfect
competition, the neoclassical trade and growth theory considers
FDI as a form of international capital movement. Accordingly,
international capital movements, and hence FDI, are explained
in terms of differential profit, or differential interest rates found
in different countries. However, following the earlier Hymer
insights into the determinants of FDI, the inadequacy of the
assumption of perfect competition in the analysis of FDI is well
established. Today, given the assumption of imperfect
competition, the eclectic theory of Dunning implies that firm-
specific advantages and their interaction with location and
internationalization advantages must also be incorporated into
the formulation of international trade and growth theory
(Dunning 1993b; Caves 1996). FDI affects the economy of a

9. host country in a variety of ways. First, it brings with it the
needed capital, and modern technology that enhances economic
growth in the recipient country (Blomstrom et al., 1996;
Dunning 1993). Second, through managerial and labor training
it augments the knowledge of the host country, stimulating
economic growth (de Mello, 1996,1997,1999). Third, it
promotes technological upgrading, in the case of start-up,
marketing, and licensing arrangements (de Mello and Sinclair,
1995, Markusen and Venables 1999). Thus, FDI can be
considered as an instrument in promoting industrial
development and technological upgrading. As such, FDI may
enhance productivity and technological progress in the host
country, contributing to its economic growth. Not only does FDI
affect the economy of a host country, the economy of the host
country has also some bearing on FDI. More specifically, the
absorptive capacity of the host country impacts the volume and
type of FDI that flows into that country. The absorptive
capacity of a host country, in turn, depends on the country’s
trade regime, legislation and political stability. It also hinges
upon scale factors, such as balance of payments constraints, and
size of domestic market for the goods produced through FDI.
The consideration of such nation-specific factors allows for
examination of such FDI-induced externalities or
“spillovers.”(de Mello, 1999). The approaches taken in
empirical studies in the area of FDI-led growth can be divided
into two groups. The first group uses cross-sectional data. The
second group applies time series data. Unfortunately, both of
these approaches have met with problems. Potential problems
with cross-sectional analysis stem from the assumption that
nations share common characteristics. However, in practice
such an assumption is not valid due to the fact that nations
differ not only in their political, economic, and institutional
structure, but also in their response to external shocks. In a nut
shell, estimates from cross sectional data are misleading
because they do not take into considerations nation-specific
features. Potential problems with time-series analysis have been

10. noted by a number of researchers. (Bewley and Yang 1996;
Blomstrom et al., 1996; Giles and Mirza, 1998; Giles and
William, 1999; Toda, 1994; Toda and Yammoto, 1998), and is
related to the inappropriateness of applying F-test statistics to
causality tests. It is now well established that the F-test
statistics is not valid if time series are integrated (Toda and
Yamamoto, 1995; Zapata and Rambaldi, 1997) and causality
tests are sensitive to model selection (Giles and Williams,
1999). This article examines the causal relationship between
economic growth and its determinants by examining unit root
properties and the new Granger non-causality tests.
THE MODEL
The theoretical model employed in this study is based on
Mankiw (1995) which emphasized that knowledge is sum of
technological and scientific breakthrough or innovation and
acknowledged human capital as master mind of these
breakthroughs and innovations. Mankiw et al (1992) model
known as augmented Solow growth model was driven from
Solow (1956) growth model in which they incorporated human
capital as factor responsible for growth as shown below;
Y= F (Kα_t Hβ t Lt At)
Where K is physical capital and α stands for rate of its
investment, H is human capital with β as the rate of its
investment, as decreasing returns to physical and human capital
sets in, their respective rate of investment decreases α+β<1.
They further stressed that saving used for investment in human
capital and technological progress will increase output of labor
and economic growth. This rate of investment can be financed
via domestic savings as foreign capital inflow from FDI which
can augment as domestic savings, with addition of human
capital coupled with technological progress the level of output
of labor will increase and stimulate growth, the rate of
technological change in an economy can increase the marginal

11. growth rate of the economy.
EMPIRICAL FINDING
STUDIES
SAMPLE
PERIOD
IMPACT OF FDI ON GDP
Oloffsdotter (1998)
50 developing
countries
1980-1990
Positive impact of
FDI on GDP
Blomström, et al
(1994)
78 developing countries
1960-1985
FDI have impact on GDP in country with particular threshold of
income level
Kang and Du 2005
20 OECD Countries
1981-2000
FDI does not have impact on GDP
Asheghian (2011)

12. Canada
1976-2008
FDI and GDP have no
bidirectional
relationship on one
another
RESULT, DISCUSSION AND CONCLUSION
In summary, regression analysis was conducted on impact of
FDI on GDP the P value was greater than 0.05 that indicates
rejection of alternative hypothesis and accepting null hypothesis
which implies that FDI didn’t have impact on Canadian GDP
during the period of study. The regression result on whether
Canadian GDP attracts FDI indicates that growth rate of
Canadian economy has less or no significance impact in
attracting foreign investors to the country. The ANNOVA result
for whether FDI led to growth in Canadian economy or foreign
investors were attracted by Canadian economic growth rate were
both insignificant. Foreign direct investment growth has no
significant impact on Canada’s economic growth and total
factor productivity in Canada. Canadian policy makers should
develop or focus on FDI measures that are more favorable
towards manufacturing sectorby strengthening regulations on
weak labor productivity, business tax environment and
excessive FDI regulations measures. As propagated by Sharpe
and Banerjee (2008) government can focus on improving
infrastructure that can enhance human capital better, embark on

13. comprehensive tax reform system and adjustment in FDI
regulation.
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forthcoming

18. APPENDIX
Year
GDP All industries
gross capital
labor in Real gross domestic product (GDP)
FDI
Q1 1990
147875
348287
61.837
290964
Q2 1990
152878
360570
61.157
295758
Q3 1990
157556
368251
60.389
291123
Q4 1990
150922
372433
59.509
300669
Q1 1991
143485
378995

19. 58.097
318454
Q2 1991
149447
383020
58.155
316830
Q3 1991
155874
386329
58.421
331139
Q4 1991
151198
387873
58.269
347191
Q1 1992
146145
391674
58.209
340538
Q2 1992
151137
402640
58.325
354787
Q3 1992
155182
406778
58.58
370981
Q4 1992
151811
406120
58.78

20. 375610
Q1 1993
148897
409077
59.374
383392
Q2 1993
154428
410627
60.051
391046
Q3 1993
159416
410526
60.84
425560
Q4 1993
155681
411315
61.273
441768
Q1 1994
153564
413003
62.612
463900
Q2 1994
161025
408424
63.742
470774
Q3 1994
167371
413216
64.924
488403

21. Q4 1994
163997
419349
65.538
506577
Q1 1995
160721
418793
66.264
537585
Q2 1995
166064
405755
66.252
557941
Q3 1995
170595
397215
66.271
566216
Q4 1995
165702
393618
66.667
608177
Q1 1996
161991
387518
66.86
635972
Q2 1996
167534
386988
67.257
669311
Q3 1996

22. 173449
384835
68.289
681777
Q4 1996
169825
384028
69.056
750184
Q1 1997
166993
378167
69.933
782010
Q2 1997
174699
135065
71.005
863586
Q3 1997
180504
138784
72.017
895172
Q4 1997
177843
134566
73.016
914823
Q1 1998
173811
132498
74.209
968251
Q2 1998
180206

23. 127515
74.313
1038713
Q3 1998
184949
117185
75.17
954918
Q4 1998
182913
110823
76.386
1096507
Q1 1999
179581
113222
77.992
1106706
Q2 1999
187130
112919
78.695
1148582
Q3 1999
194435
115862
80.183
1201708
Q4 1999
191901
117077
81.473
1214222
Q1 2000
188993
118032

24. 83.19
1263646
Q2 2000
196153
117890
84.279
1357321
Q3 2000
202478
117471
85.208
1349488
Q4 2000
199214
118079
85.239
1336508
Q1 2001
193624
117787
85.622
1288929
Q2 2001
199660
120581
85.754
1269595

25. SUMMARY OUTPUT GDP on FDI
Regression Statistics
Multiple R0.968885
R Square0.938737
Adjusted R Square0.937345
Standard Error4182.53
Observations46
ANOVA
dfSSMSFSignificance F
Regression11.18E+101.18E+10674.22.56561E-28
Residual447.7E+0817493559
Total451.26E+10
CoefficientsStandard Errort StatP-valueLower 95%Upper
95%Lower 95.0%Upper 95.0%
Intercept137332.61362.79100.77321E-
53134586.1272140079.2134586.1140079.2
INVESTMENT0.0445760.00171725.965693E-
280.0411165310.0480360.0411170.048036
SUMMARY OUTPUT FDI on Gross capital
Regression Statistics

26. Multiple R0.902562
R Square0.814618
Adjusted R Square0.810405
Standard Error158140
Observations46
ANOVA
dfSSMSFSignificance F
Regression14.84E+124.84E+12193.31.04146E-17
Residual441.1E+122.5E+10
Total455.94E+12
CoefficientsStandard Errort StatP-valueLower 95%Upper
95%Lower 95.0%Upper 95.0%
Intercept142618856675.5725.164079E-
281311965.909154041013119661540410
gross capital-2.449180.176137-13.90491E-17-2.80416051-
2.0942-2.80416-2.0942
SUMMARY OUTPUT FDI on GDP
Regression Statistics
Multiple R0.968885
R Square0.938737
Adjusted R Square0.937345
Standard Error90908.85
Observations46
ANOVA
dfSSMSFSignificance F
Regression15.57E+125.57E+12674.21732.56561E-28
Residual443.64E+118.26E+09
Total455.94E+12
CoefficientsStandard Errort StatP-valueLower 95%Upper
95%Lower 95.0%Upper 95.0%
Intercept-2848729137628.4-20.69872.62E-24-3126100.993-
2571358-3126101-2571358
GDP All industries21.059060.81103425.965692.57E-
2819.4245323722.693619.4245322.6936
The first thing you have to do is chose a topic, collect data, and

27. then estimate relationships using the techniques of Chapters of
multiple regression and regression analysis: model building.
1. Do not use any of the data sets that come with different
textbooks. Too many other people have used those data sets.
The data source should to be one that you have actually found
and verified.
2. Make sure you explain what you are doing clearly with
references. The project/paper will have to be properly written.
Make sure you following proper citation rules for any
information you got from another source, Only APA style.
3. The sample size should of at least five independent variables.
The independent variables should not be part of the dependent
variable by construction.
4. The project should involve applying the regression analysis
in excel only.
5. Somewhere the project you should have information on
relevant descriptive statistics. Relevant does not mean
everything Excel can print out. At a minimum it should include
the mean and standard deviation of the variables involved.
However, you may decide that other statistics might provide
useful information (e.g. in some cases, the range of the
variables might be relevant). This information could either be
on a separate table of descriptive statistics or combined with
regression tables.
6. For the regression tables, as mentioned in the information
posted on Moodle, you should not just copy from Excel but
instead type proper tables. You should have a regression table
that has both your original model (before you eliminate
variables) and your final Model. The sample projects contain
some examples. Note, you do not need separate tables for the

28. two models.
NOTE: REGRESSIONS SHOULD BE RUN IN EXCEL ONLY