In this analysis, we estimate a vector error correction model (VECRM) to further study the relationship among three key economic variables: export, FDI, and GDP. One interesting feature of our study is the use of panel data including 15 cross section ...
In this analysis, we estimate a vector error correction model (VECRM) to further study the relationship among three key economic variables: export, FDI, and GDP. One interesting feature of our study is the use of panel data including 15 cross section (EU15 countries) and 40 years in the VECRM. Assuming homogenous parameters across EU 15 countries in the model, we are able to identify both long-run and short run relationship between the key openness variables (FDI and export) and GDP by pooling a rich panel data set. To avoid spurious regression, we perform a panel unit root test (MU test) and a panel cointegration test. Identifying I(1) of the variables at issue, we perform a multivariate analysis using Johansen (1988) and Johansen and Juselius (1990) maximum likelihood procedure. From our Granger-type causality tests, we can again confirm the export-led growth hypothesis in the EU15 region. This implies that the export-led growth is not a region-specific phenomenon which is found in East Asia, but supportable in other regions. Just as in East Asia, the economic growth in the EU seems to have benefited a lot from its export performance. However, we cannot support the FDI-led growth hypothesis in the EU countries. It is GDP that causes FDI inflow in the EU15 and not vice versa.