CC BY
91Scientific Journal Impact Factor
FOREIGN DIRECT INVESTMENT (FDI) AND ECONOMIC GROWTH IN
AFGHANISTAN Noman Qauymi ibni Abdul Rahman Second year economy master student of Termez state university Email: [email protected]
Abstract: In This research I would like to analyze the relationship between Foreign Direct Investment (FDI) and then its effects in economic growth of Afghanistan. The main aim of this paper is to realize the impact of key economic variables i.e. FDI, inflation rate, exchange rate and interest rate on economic growth of Afghanistan. The number of secondary data is used in between 2005-2016 fiscal years. Gorse domestic product is considered as dependent variable, whereas foreign direct investment, exchange rate, inflation rate and interest rates are considered as independent variable. To mentioned research multiple regression analysis has been used and the result stated that all variables express a positive impact on economic growth except foreign direct investment and inflation rate which show a down word and negative impact. This research recommend that it's a need for stabilization in inflation rate and considering the (FDI) the source of economic growth, there is a need of economic policy bound for attracting foreign direct investment.
Keywords: Economic growth, Afghanistan, Foreign Direct Investment (FDI) Exchange rate, Inflation; Interest Rate.
Аннотация: В этом исследовании я хотел бы проанализировать взаимосвязь между прямыми иностранными инвестициями (ПИИ) и их влиянием на экономический рост Афганистана. Основная цель этого документа - понять влияние ключевых экономических переменных, таких как прямые иностранные инвестиции, уровень инфляции, обменный курс и процентная ставка, на экономический рост Афганистана. Количество вторичных данных используется в период между 2005-2016 финансовыми годами. Внутренний продукт морского скота считается зависимой переменной, тогда как прямые иностранные инвестиции, обменный курс, уровень инфляции и процентные ставки рассматриваются как независимая переменная. В упомянутом исследовании использовался множественный регрессионный анализ, и результат показал, что все переменные выражают положительное влияние на экономический рост, за исключением прямых иностранных инвестиций и уровня инфляции, которые показывают отрицательное влияние и отрицательное влияние. В этом исследовании говорится о необходимости стабилизации уровня инфляции и, учитывая (ПИИ)
Scientific Journal Impact Factor
как источник экономического роста, необходима экономическая политика, направленная на привлечение прямых иностранных инвестиций.
Ключевые слова: экономический рост, Афганистан, обменный курс прямых иностранных инвестиций (ПИИ), инфляция; Процентная ставка.
Annotatsiya: Ushbu tadqiqotda men to'g'ridan-to'g'ri xorijiy investitsiyalar (XIM) bilan o'zaro bog'liqlikni va keyinchalik uning Afg'onistonning iqtisodiy o'sishidagi ta'sirini tahlil qilmoqchiman. Ushbu maqolaning asosiy maqsadi asosiy iqtisodiy o'zgaruvchilarning, ya'ni to'g'ridan to'g'ri investitsiyalarning, inflyatsiya darajasi, valyuta kursi va foiz stavkalarining Afg'onistonning iqtisodiy o'sishiga ta'sirini anglashdir. Ikkilamchi ma'lumotlar soni 2005-2016 moliya yillari orasida ishlatilgan. Gorse ichki mahsuloti o'zgaruvchan, to'g'ridan-to'g'ri xorijiy investitsiyalar, valyuta kursi, inflyatsiya darajasi va foiz stavkalari mustaqil o'zgaruvchan deb hisoblanadi. Yuqorida aytib o'tilgan tadqiqotlarda bir nechta regressiya tahlili ishlatilgan va natijada barcha o'zgaruvchilar iqtisodiy o'sishga ijobiy ta'sir ko'rsatishi, bundan tashqari to'g'ridan-to'g'ri xorijiy investitsiyalar va inflyatsiya darajasi past va salbiy ta'sir ko'rsatmoqda. Ushbu tadqiqot inflyatsiya darajasini barqarorlashtirish zarurligini va iqtisodiy o'sishni manbasini hisobga olgan holda, to'g'ridan-to'g'ri xorijiy investitsiyalarni jalb qilish uchun iqtisodiy siyosatga ehtiyoj borligini tavsiya qiladi.
Kalit so'zlar: Iqtisodiy o'sish, Afg'oniston, To'g'ridan-to'g'ri xorijiy investitsiyalar (FTI) valyuta kursi, inflyatsiya; Stavka foizi.
Foreign Direct Investment (FDI) and Economic growth are of essential importance for the economy of countries. Several number of research is held on this topic, as far as investing in foreign countries is one of the highlights for investors that could lead them to higher income and return. Performing this research is very crucial for economic decision making that drives investment and capital. As International Business refers to those activities that include transfer of goods, services, people, ideas, resources and technologies across boundaries, studies based on international business, will affect above-mentioned activities both in local and global markets, apart from these different countries, government and companies endure these activities. Nowadays Individuals who would like to be successful in doing business and recognizing opportunities needs to understand the nature and diversity of marketplace and intake risks, uncertainties so that they be able to make their own place in global market. Foreign direct Investment or shortly FDI defines to be an investment by an company or investor in a business from a host country to another country, having control over company acquire. Acquiring international enterprise are
INTRODUCTION
Scientific Journal Impact Factor
known as acquisition or brownfield. Increase in the capacity of an economyto produce services and goods, comparing from one tome to another" said to be economic growth. More elaboration will be required for research as there are vast indicators to summarize a country economyand its performance globally.
Noman Qauymi have conducted his study on determinants of FDI in Afghanistan showing theircapital inflow. There are investigations about the impact of FDI in Afghanistan economy in particular. Their research is supported by OLS method, for year (2005-2015) and the result of their study showed positive relation of FDI with determinants excluding inflation rate which showed negative impact. Muhammad et al. (2013) showed nexus between interest rate and investment from Pakistan prospective. These researchers have showed impact of interest rate for an investor, investing within country. They have used this method for year (1964- 2012). The results of this study were that investment is one of the key determinants for GDP and it can cause an improved economy. They concluded that interest rate and investment are directly related to one another; hence fluctuation in interest rate would either cause loss in investment or saving for Pakistan economy. Ahmad (2013) focused on the economy of Pakistan showing that exchange rate is highly associated with growth rate. The result & analysis for this research study were that Pakistan occupies greater import balances than export balances, which lacks improvements in goods that are being exported. The research concluded that there is difference between balance of payments and trade balance and therefore the economy shows negative result and growth rate remains low. Zilinske (2010) conducted a study to show that foreign direct investments can have both the effects. There can be positive as well negative influence of FDI within a country. According to his research Greenfield FDI showed positive outcomes in a nation where as merger & acquisition showed negative impact on economic growth of host country. Mun et al (2008) specifically designed their study to know the relationship of FDI and economic growth in Malaysia. They have used year (1970-2005) using OLS method. The result and analysis are such that FDI is a good source of income for Malaysian economy, as it attracts more employment, technology and competitive goods. Lee and Tcha (2004) concluded from their research paper that FDI is a moderating engine for economic growth and has considered as the only source which can bring growth and modernization for the countries with weak and low economies. Buckley et al. (2002) and De Mello (1999) study is based on China. They have used data for year 1996, 1999, 2000, and 2001. Based on their researcher findings, it was concluded that FDI has both positive and negative impact. The results lead to debatable topic, because they concluded we
LITERATURE REVIEW
Scientific Journal Impact Factor
cannot entirely say FDI has positive or negative on an economy. So they articulated it as conflicting findings. They say countries who possess that FDI has positive impact bring them capital inflow, job creation, increase in income level and many other aspects. Further they concluded that FDI is dependent on the social, economic, political, technology aspects or conditions of Host country whetherthey can support FDI or not. It entirely depends on capacity of host country to attract FDI. Malik and Chaodhry (2001) conducted their study for four Asian countries namely; India, Pakistan, Sri Lanka and Bangladesh. They wanted to examine the long run positive relationship with economies of these countries. This study used co- integration and error correction model. Hence according to their results they said that there exists relationship between GDP growth rate and Inflation rate among all these four countries showing that a moderate inflation rate could lead to positive impact on economy. Hanson (2001) examined outward foreign direct investment (OFDI) in Chinese economy perspective. His conclusions are that china has strong effects of rising exports due to OFDI. The recommendations suggested that china should focus more on dual effects of exporting and support platform for OFDI. Moreover, government should be supporting implementation of mixed inter-trade and strategies for investments, which could give opportunities for overseas investments. Borensztein et al (1998) analyzed 69 developing countries from previous two decades by regression framework. They concluded that FDI is an important vehicle for transmission of technology which contributes more to economic growth than domestic investment. They also determined that if a host country possesses sufficient advance technological capabilities they can attract FDI from other countries. Balasubramanym et al (1996) examined the impact of FDI on developing economies. They have utilized OLS method and cross section method. Researcher also followed Durham (2004) whose study research conducted effects of FDI on economic growth of 80 developing countries, which suggested that FDI has and adverse effect dependent on the absorptive capacity of host country. According to their research countries whom possess outward oriented trade policy can attract more FDI and have positive impact rather than countries having inward trade policy. From all research study, it is said that FDI is vehicle of economic growth to host countries, but if they are able to take benefit from inflows and transfer new technological aspects to host country. So, the effects of foreign direct investment on economy of the host countries are yet debatable. A massive number of studies possess to find out the results of FDI on the economy but there is no agreement. Few of studies came up alongside the findings that FDI possesses positive affect on the economy as others conclude negative impact. Some studies discovered that the influence of FDI depends on the absorptive
Scientific Journal Impact Factor
capacity of the host country that includes governmental, economic and technology condition. Based on all above research we also conclude our bases and more specifically to know FDI relationship with variables as Inflation rate, exchange rate, interest rate and etc, in economic growth in Afghanistan
Economy of Afghanistan is one of the developing economies from eras of war and conflict. This economy still remained dependent over foreign countries supports and aids and investments since 2001, a lot of challenges has been faced in post-2014 era regarding transitions into security, economic and political aspects. It shows decline in Afghanistan economy due to extraction of foreign troops, support and aids Economy of Afghanistan faced challenges since 2016 with continuous uncertainty of provinces such as Helmand and Kunduz which are key and northern cities which showed progress of Taliban missions and activities in those cities and became headlines thus foreign investments declined and it became reason for such condition affected businessmen and investors mind to invest in Afghanistan resulting extremely poor economy despite of fact that have been positive change in life expectancy, income and education since 2001. High number of Afghans lacks clean water, electricity, medical care and unemployment. Above mentioned factors cause Afghanistan living standard to be low in world. Resulting weak infrastructure insecurity, high corruption, and government laws of the country makes it very hard and pose struggles and barriers to future economic growth. Nowadays Afghanistan economy is stands on agriculture sector which covers an important part of GDP. In 2016 we had low harvests especially on cereals. Due to insecurity weather has been aggravated causing diseases and constrained agriculture productions. The conferences of Warsaw and Brussels were crucial to grantee a continued support until year 2020. Afghanistan's supporting countries pledged an amount of $4.5 billion security grants and $3.8 development support billion annually. Government of Afghanistan encourages and invite FDI focused on improving and developing infrastructure, pursing engagement in bilateral and multilateral trade agreements and economy related reforms in construction, and transport and logistic. Foreign direct investments decreased from the year 2005 to 2013 in Afghanistan due to lack of rule of law. Afghanistan toke the rank of last globally and regionally on the support and strength of investor protection in World Bank doing business 2012 report.
The high number of sector attracting foreign direct investment in Afghanistan was the service sector almost 89% while manufacturing attracted around 10% and agriculture one percent, this information is taken by AISA. Some studies proved that there was a decline in foreign direct investment in 2011 till now, but the new
FDI in Afghan Economy
Scientific Journal Impact Factor
strategies are projected to boost investors for investing that hundred millions of dollars in foreign direct investment and aid assistance, both foreigners and Afghan, to invest money into the economy. Foreign direct investment in Afghan economy is covering 43% of country gross domestic product as there has been around $83 million of foreign direct investment. Some of the foreign direct investment projects implemented in Afghanistan in 2016 and 2017 are described below, briefly:
In 2016, Iran, Afghanistan and India signed the CHABAHAR sea port agreement. The arrival of first freight train in Afghanistan's Hairatan port from China via Kazakistan and Uzbekistan. In 2017, inauguration of the trilateral railway in Turkmenistan, which connected Afghanistan to an international railway network, were other significant steps in the right direction. In the same context, another important achievement was Afghanistan's formal admission to the World Trade Organization (WTO) in July. The other achievement, the Salma Dam, which was inaugurated in June by Indian and Afghan leaders, was an important breakthrough in energy infrastructure development in Afghanistan. This national project can produce 42 megawatts electricity and irrigate 80,000 hectares of farmland. There has been made 200$ million Investment in telecommunication sector more specifically Roshan wireless company by Agha khan foundation. Another investment is made for an amount of 150$ million in Afghan wireless company by US based telephone International company. Huge investment of Habib Gulzar Company, whom invested in owning patents for bottling plant (Coca-cola) and PepsiCo is competing against Alokozay bottling plant. Developments in Afghanistan economy will grantee and ensure consistency, cost-effective trade and transit opportunities in the region. Hopefully there will be expected gains of these projects will not be realized in short term.
Fig 1: Foreign Direct Investment, Net inflow (BOP, Us $)
Scientific Journal Impact Factor
O
Afghan legal system must be supported to shield investor's property rights and contract legislation. More over the problems I faced during this research was luck of data, Ministry of Finance must take responsibility for providing data on timely basis for research studies so that researchers should provide them with better strategy implementation, after conducting time consuming research.
1 .Ahmad, A., Ahmad, N., & Sharafat, A. (2013). Exchange rate and economic growth in Pakistan. Journal of Basic and Applied Sciences, Vol.3, No.8, pp. 740-746.
2. Buckley, P. J., Clegg, J., & Wang, C. (2006). Inward FDI and host country productivity: evidence from China's electronics industry. Transnational Corporations, 15(1), 13-37.
3. De, L. R. (1999). Foreign direct investment-led growth: evidence from time series and panel data. Oxford Economic Papers, 51(1), 133-151.
4. Durham, J. B. (2004). Absorptive capacity and the effects of foreign direct investment and equity
5. foreign portfolio investment on economic growth. European economic review, 48(2),285-306.
6. Najera A,. & Hamid H. (2017) Impact of foreign direct investment on the economic growth of Pakistan: An analysis Pakistan Journal of Commerce and Social Sciences, vol. 7, (1), pp. 100-121.
7. Wani, N.U.H., & Rehman, N. (2017) Determinants of FDI in Afghanistan: An empirical analysis.
8. Muhammad, D. S., Lakhan, R., Ghulam, K., & Numan, M. (2013). Rate of interest and its impact
on investment to the extent of Pakistan. Pakistan Journal of Commerce and Social Sciences, vol. 7, (1), pp. 91-99.
9. Malik, K. (2015). Impact of foreign direct investment on economic growth of Pakistan. American Journal of Business and Management, 4(4), 190-202.
10. Har, W. M., Teo, K. L., & Yee, K. M. (2008). FDI and economic growth relationship: An empirical study on Malaysia. Journal of International Economics, 45(1), 115-135.
11. Hanson, G. H., Mataloni Jr, R. J., & Slaughter, M. J. (2001). Expansion strategies of US multinational firms (No. W8433). National Bureau of Economic Research.
12. Lee, M., & Tcha, M. (2004). The color of money: The effects of foreign direct investment on economic growth in transition economies. Review of World Economics, 140(2), 211-229.
REFERENCES:
