In economic growth given by FDI can

In
fluctuated economy, the increase in foreign direct investment (FDI) in 1980s
and 1990s attract policy-makers and researchers to argue about the relationship
between FDI and economic growth. This paper summarizes the journal “Foreign
Direct Investment and Economic Growth: The Growth Accounting Perspective” of
Miao Wang and Sunny Wong.

Physical
Capital and Intangible Assets is considered to transfer by FDI so that
governments of many countries try to attract inward FDI by benefit policies of
incentives and taxes. As the result, over 100 countries were attracted since
new 974 FDI regulatory have been applied (UNCTAD, 2006).

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The
question is whether economic growth given by FDI can improve certain social or
economic condition. With the same assumption that capital human is adequate and
financial system have good development,  Borensztain, De Gregorio and Lee (1998) found
out when the human capital reach its threshold then inward FDI improve the host
country’s economic growth, meanwhile Alfaro, Chanda, Kalemli-Ozcan and Sayek
(2004) affirmed FDI is not enough factors to change host country’s economic
growth.

In order
to answer the question, Miao and Sunny based on data of both these journals to
explain further how human capital and financial system give an impact on
economic growth.

Firstly,
the author uses data of Borensztain, De Gregorio and Lee (1998) of 69 countries
during from 1970 to 1979 and from 1980 to 1989 with seemingly unrelated
regression method. Using empirical analysis, they illustrated detail statistic
for all averaged variables over two decades and apply the Cobb-Douglas
production function: TFP Growth = per capita real GDP growth – ? × Capital Growth.
In there, labor share (1-?) fluctuate from 0.47 to 0.72 (Gollin, 2002) then we
can measure TFP growth margin. Additionally, we study the positive interrelations
between FDI and human capital, FDI and financial depth, FDI and square
financial depth and other related negative variables including log value initial
GDP, government size, inflation rate and black market premium. Human capital is
calculated by average year of over 25 years old-males in secondary school,
financial depth is calculated by interest-bearing liabilities in banks and
other financial intermediate institutions and currency demand deposit, log
value of initial GDP come from real GDP in 1970s, government expenditure
calculates government size, change rate in GDP deflator is inflation rate and the
gap between OTC exchange market and official exchange market give black market
premium.

From the
result of TFP Growth regression, Data showed that both human capital and
financial depth specially have positive effect when the variable stands alone. Because
the strongly positive effect of financial depth, they concluded that financial
development can bring productivity growth and physical capital growth to
economic which consisted with Beck, Levine and Loayza (2000).

FDI have
negative relation with TFP Growth but Human capital. It means inward FDI is not
enough strong to give impact on productivity growth promotion of host country.
FDI can make significant coefficient only when level of human obtain its
threshold suggested about 0.52 to 1.13 years (Borensztain, De Gregorio and Lee,
1998). 38 of 69 sample countries reach 0.73 years of secondary schooling as the
result. Also, the figures illustrated financial depth is not coefficient with
FDI anymore when schooling interrelation is included.

From
capital growth regression, financial depth is significant meanwhile schooling
is not complemented with FDI to effect capital growth.

By tax
break and other attractive treatment, government support multinational
cooperation to increase inward FDI. While many arguments and researches
indicate the final impact of FDI to economic growth, we need to know how FDI
interact economy in progress through physical capital growth and TPF growth.
According to data analysis of 69 countries over 2 periods, the results
indicated that there is no significant coefficient between FDI and financial
depth in TPF growth regression and between FDI and human capital in capital
growth regression. Policy makers should concern the suggestion that the key of
relation between FDI and productivity growth is human capital, the financial
depth is main issues of FDI and capital growth connection