DO GDP (Growth & Current), Exchange

Rate, Tax Rate & Inflation Volatility

Effects Foreign Direct Investment?

Evidence from Selected Asian Economies
Group Members
Haseeb-ur-Rehman

Omer Ejaz
Introduction
This paper investigates the impact on foreign direct
investment due to the Inflation (Consumer Prices), Official
Exchange Rate, GDP (Current $ USD), GDP Growth Annual Percent
Rate & Total Tax Rate of Commercial of (03) three Asian countries
i.e Pakistan, Bangladesh & India. Secondary data has been
gathered from the WorldBank website and articles during the time
period of 1980 to 2011 for this purpose. In this paper, five variables
are used Inflation, GDP (Current & Growth), Exchange Rate, Tax
Rate are taken as independent variable whereas FDI is taken as
dependant variables. To assess the impact of FDI on five
dependant variables, time series data regression has been
used.

Purpose of Study
Purpose of study is that we want to know that how much
independent variables Inflation, Tax Rate, GDP Growth,
Exchange Rate, GDP Current affect the dependent variable FDI
in three South Asian countries i.e. Pakistan, Bangladesh and
India. For this purpose we use multiple regression that
mentioned in Methodology and also described the results and
we want to compare these countries i.e Pakistan, Bangladesh
& India.
Research Problem
Factors that effects the FDI in Pakistan,
Bangladesh & India.

Research Question
Is GDP current, GDP growth, exchange rate,
tax rate and inflation has an effect on FDI of
three countries i.e Pakistan, Bangladesh &
India?

Research Objective
We want to prepare Dependant Variable (FDI)
and Independent Variables of three countries
i.e Pakistan, Bangladesh & India.

Significant of Study
In this study we have selected FDI as dependent
variable, because FDI is important variable which is
affected by independent variables (inflation rate,
exchange rate, corporate tax rate, GDP, GDP Growth
rate). In our study we find out the relationship
between dependent and independent variables. Its
mean how much strongly effect the independent
variables to dependent variable. We hope the
selected independent variables have strong effect on
FDI in Pakistan, Bangladesh & India.

Hypotheses
1st Hypotheses
H0 = There is no relationship between FDI and Inflation.
H1 = There is a relationship between FDI and Inflation.
2nd Hypotheses
H0 = There is no relationship between FDI and Exchange Rate.
H1 = There is a relationship between FDI and Exchange Rate.
3rd Hypotheses
H0 = There is no relationship between FDI and GDP.
H1 = There is a relationship between FDI and GDP.
4th Hypotheses
H0 = There is no relationship between FDI and GDP Growth Rate.
H1 = There is a relationship between FDI and GDP Growth Rate.
5th Hypotheses
H0 = There is no relationship between FDI and Corporate tax Rate.
H1 = There is a relationship between FDI and Corporate tax Rate.

Research Model
Y (FDI) = a+ b (GDP Current) +b (GDP Growth)
+b (Exchange Rate) +b (Tax Rate)+ b (Inflation)
Results
Coefficients


Model Unstandardized Coefficients Standardized
Coefficients
t Sig.
B Std. Error Beta
1
(Constant) -9775583799.577 6209552682.325

-1.574 .360
GDP Current Bangladesh .020 .029 2.231 .695 .613
GDP Growth Bangladesh 926347149.731 1111850317.083 1.847 .833 .558
Exchange Rate Bangladesh -114855353.614 173441855.259 -1.827 -.662 .628
Tax Rate Bangladesh 316444035.857 256149890.144 1.334 1.235 .433
Inflation Bangladesh -227123832.563 167002406.420 -2.220 -1.360 .404
a. Dependent Variable: FDI Bangladesh
Bangladesh
Interpretation:

Y=a+ b GDP Current +b GDP Growth +b Exchange Rate +b Tax Rate+ b Inflation
Where
Y=FDI
a= Constant
b=Beta
If GDP Current increases by one unit then FDI will increase by .20 units.
If GDP Growth increases by one unit then FDI will increase by 926347149.731
units.
If Exchange Rate increases by one unit then FDI will decrease by -9775583799.577
units.
If Tax Rate increases by one unit then FDI will increase by 316444035.857 units.
If Inflation increases by one unit then FDI will decrease by -227123832.563 units
Hypothesis

Hypothesis described the relation between dependent and independent variable.
P-value >
0.613>0.05 Accept Ho
GDP current is not significant means GDP current not explaining the dependent variable FDI in detail.

P-value>
0.558>0.05 Accept Ho
GDP Growth is not significant means GDP current not explaining the dependent variable FDI in detail.
P-value>
0.628>0.05 Accept Ho
Exchange Rate is not significant means GDP current not explaining the dependent variable FDI in detail.
P-value>
0.433>0.05 Accept Ho
Tax Rate is not significant means GDP current not explaining the dependent variable FDI in detail
P-value>
0.404>0.05 Accept Ho
Inflation is not significant means GDP current not explaining the dependent variable FDI in detail

Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate
1 .952 .907 .439 134385875.04279
a. Predictors: (Constant), Inflation Bangladesh, Tax Rate Bangladesh, GDP Growth Bangladesh, Exchange Rate Bangladesh, GDP
Current Bangladesh
R:
This table indicates that there is strong positive correlation between
Dependent variable FDI and independent variables Inflation, Tax Rate,
GDP Growth, Exchange Rate, and GDP Current.
Adjusted R-Square:
Adjusted R-Square is used when the regression is multiple.
Interpretation:
0.439 % variance in FDI is due to inflation, Exchange Rate, GDP
(Current & Growth), & Tax Rate and remaining variance due to other
factors.


India

Model Unstandardized Coefficients Standardized
Coefficients
T Sig.
B Std. Error Beta
1
(Constant) -28569909214.986 85413548449.190

-.334 .795
GDP Current India .003 .009 .163 .362 .779
GDP Growth India 2540344758.615 742346825.228 .796 3.422 .181
Exchange Rate India 72229596.894 1107986830.121 .022 .065 .959
Tax Rate India 30733360.232 654860016.800 .017 .047 .970
Inflation India -1826824594.897 1153750620.723 -.674 -1.583 .359
a. Dependent Variable: FDI India
Interpretation:

Y=a+ b GDP Current +b GDP Growth +b Exchange Rate +b Tax Rate+ b
Inflation

If GDP Current increases by one unit then FDI will increase by .003 units.
If GDP Growth increases by one unit then FDI will increase by
2540344758.615 units.
If Exchange Rate increases by one unit then FDI will increase by
72229596.894units.
If Tax Rate increases by one unit then FDI will increase by30733360.232
units.
If Inflation increases by one unit then FDI will decrease by -1826824594.897
units.

Hypothesis

Hypothesis described the relation between dependent and independent variable.
P-value >
0.779>0.05 Accept Ho
GDP current is not significant means GDP current not explaining the dependent variable FDI in detail.
P-value>
0.181>0.05 Accept Ho
GDP Growth is not significant means GDP current not explaining the dependent variable FDI in detail.
P-value>
0.959>0.05 Accept Ho
Exchange Rate is not significant means GDP current not explaining the dependent variable FDI in detail.
P-value>
0.970>0.05 Accept Ho
Tax Rate is not significant means GDP current not explaining the dependent variable FDI in detail
P-value>
0.359>0.05 Accept Ho
Inflation is not significant means GDP current not explaining the dependent variable FDI in detail.


Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate
1 .974 .948 .687 4161481015.62931
a. Predictors: (Constant), Inflation India, Tax Rate India, GDP Growth India, Exchange Rate India, GDP Current India.

R:
This table indicates that there is strong positive correlation between
Dependent variable FDI and independent variables Inflation, Tax Rate,
GDP Growth, Exchange Rate, and GDP Current.
Adjusted R-Square:
Adjusted R-Square is used when the regression is multiple.
Interpretation:
0.687 % variance in FDI is due to inflation, Exchange Rate, GDP (Current
& Growth), & Tax Rate and remaining variance due to other factors.



Pakistan

Coefficients

Model Unstandardized Coefficients Standardized
Coefficients
t Sig.
B Std. Error Beta
1
(Constant) -47715071436.289 5588115674.096

-8.539 .074
GDP Current Pakistan -.041 .030 -.783 -1.356 .405
GDP Growth Pakistan -10915958.746 660649716.122 -.013 -.017 .989
Exchange Rate Pakistan 336459522.067 61821173.826 2.359 5.442 .116
Tax Rate Pakistan 607985729.366 187653675.101 2.057 3.240 .191
Inflation Pakistan 385230398.896 93648909.572 .986 4.114 .152
a. Dependent Variable: FDI Pakistan
Interpretation:

Y=a+ b GDP Current +b GDP Growth +b Exchange Rate +b Tax Rate+ b
Inflation

If GDP Current increases by one unit then FDI will decrease by
-47715071436.289units.
If GDP Growth increases by one unit then FDI will decrease by
-47715071436.289units.
If Exchange Rate increases by one unit then FDI will increase by
336459522.067units.
If Tax Rate increases by one unit then FDI will increase by 607985729.366
units.
If Inflation increases by one unit then FDI will increase by 385230398.896
units
Hypothesis

P-value >
0.405>0.05 Accept Ho
GDP current is not significant means GDP current not explaining the dependent variable FDI in detail.
P-value>
0.989>0.05 Accept Ho
GDP Growth is not significant means GDP current not explaining the dependent variable FDI in detail.
P-value>
0.161>0.05 Accept Ho
Exchange Rate is not significant means GDP current not explaining the dependent variable FDI in detail.
P-value>
0.191>0.05 Accept Ho
Tax Rate is not significant means GDP current not explaining the dependent variable FDI in detail

P-value>
0.152>0.05 Accept Ho
Inflation is not significant means GDP current not explaining the dependent variable FDI in detai
Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate
1 .997 .995 .970 304260823.06579
a. Predictors: (Constant), Inflation Pakistan, GDP Current Pakistan, Exchange Rate Pakistan, Tax Rate Pakistan, GDP Growth Pakistan

R:
This table indicates that there is strong positive correlation between
Dependent variable FDI and independent variables Inflation, Tax Rate,
GDP Growth, Exchange Rate, and GDP Current.
Adjusted R-Square:
Adjusted R-Square is used when the regression is multiple.
Interpretation:
0.970 % variance in FDI is due to inflation, Exchange Rate, GDP (Current
& Growth), & Tax Rate and remaining variance due to other factors.
Conclusion

The main objective of our study is to analyze the
relationship between FDI and GDP Growth & Current,
Exchange Rate, Tax Rate & Inflation in Pakistan,
Bangladesh and India. However, to examine the impact
of FDI on Independent Variables using multiple
regression with time series data from 1980 to 2011, we
got the ambiguous result. The above empirical exercise
does not find any significant role for FDI in the five
Independent variables of three countries Pakistan,
Bangladesh & India. All the three countries needs more
FDI to the priority sectors, so that countries get
immediate yields from the investment.