# an ecm of fdi

## an ecm of fdi

INTRODUCTIONThis study attempts to incorporate a trace variable (FDI) into the augmented Solow model Mankiw et al (1992) and test it with the Malaysian economy. Also to run regressions, try to identify problems with the regression and attempt correcting them.
It has been argued that FDI may obstruct domestic industries by not giving them equal basis for competition Agosin and Machado (2005). However, contrary to that it has been argued that it is crucial in boosting growth Barro and Sala-i-Martin (1997). Romer (1999) suggested that it provides physical capital, best practices, technical know-how, marketing and managerial efficiencies. Sukar et al (2011) argued that these leads to more jobs hence growth. Based on their argument that FDI improves balance of payment through direct inflow of capital and also increase revenue through taxation thereby boosting capital formation, I would like to introduce FDI into the augmented Solow model through capital by breaking it into two.
The below formulation describes in a linear form the original work of Solow (1956)
Y=A f (K, L)
Y=A Kα Lβ
However it was augmented to
Y=A f (K, L, H)
Y=A Kα Lβ Yɣ
Assuming constant returns to scale ɣ=1-α-β
Divide through by L
y=a kα hɣ
log y= log a +αlog k +ɣlog h +e
However we can assume FDI as a kind of investment so it’s being referred to as K2 hence;
log y= log a +α1 log k1 + α2 log k2 +ɣlog h +e
ly=a +α1 lk1 + α2 lk2 +ɣlh +e
where; .) Y=GDP
y=GDP per capita
K1=capital
H= Human capital
L= Labour
K2=Foreign direct investment,
A= Total factor production (TFP)
B.) LY=GDP per capita in constant (2000US\$) (LOG)
LK=Gross capital formation (% of GDP) (LOG)
LH=School enrolment, secondary (% gross) (LOG)
LF=Foreign direct investment, net inflows (% of GDP) (LOG)
Where: LK=LK1
LF=LK2
A random look at the figures for each variable...