MGMT 503 Prof. Dr. Sami Fethi THE IMPACT OF REMITTANCE, CAPITAL, LABOR, FDI, AIDS,INVESTMENT AND INFLATION RATE ON GDP Students: D E S Evidence from time series data over the period: 1970 – (A case study o f Nepal)

 THE AIM OF THE STUDY  INTRODUCTION  LITERATURE REVIEW  THE EMPERICAL METHODOLOGY  INTERPRETATION OF EMPERICAL RESULTS  CONCLUDING REMARKS & POLICY IMPLICATION  RECOMMENDATION OUTLINE OF THE STUDY

AIM OF THE STUDY  The aim of this study is to show how the empirical evidence on the impact of remittance, capital, labor, investment, inflation rate, foreign direct investment, foreign aids on Nepal’s GDP by using annual time series data from

INTRODUCTION  Remittance can be define as transfer of money by a foreign worker to an individual in his or her home country. Money sent home by migrants competes with international aid as one of the largest financial inflows to developing countries. In 2003 according to the world bank report, $404 billion went to developing countries (which is a new record) with overall global remittance total equals 542 billion.  Foreign aid measure as ODA (Official Development Assistance). The main objective of ODA is the promotion of the economic growth and welfare. It includes multilateral (World Bank, ADB, IDB etc.) and bilateral loans (including governments and their agencies). These cover the cost of the capital goods, machinery and equipment for the projects.

 Foreign direct investments are net inflows of investment to acquire a lasting management interest (10% or more voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital and short-term capital as shown in the balance of payment  Inflation rates are amounts charged in consumer prices index annually. In the contest of Nepal, it has higher percentage of inflation rate among south Asian nations which is 9.6 almost 10 percent annual rate. INTRODUCTION (CONTD)

LITERATURE REVIEW  Remittance has been a global phenomenon and especially it is vital for country like Nepal which receives highest proportion of remittance in terms of GDP, approximately receiving remittance worth of 25% of GDP (World Bank, 2012).  Regarding to impact of remittances an empirical studies have demonstrate that basically large portion of international remittance income goes to consumption, investments and savings (Dustmann and Kirchamp, 2001; Woodruff and Zenteno, 2001; Adams, 2002).

 Foreign aid is always considered as crucial part for least developing countries in the procedure of economic development. All though various scholars have noted about pros and cons of foreign aids, the main target of aids is to promote economic growth and improve the level of well-beings belongs of the citizens.  Despite the fact, aid has been always a controversial topic over its effectiveness in receipt countries. Many countries which has high level of foreign capital flows and aid as the main sources of income, has visualize just as optimistic result on economic development. LITERATURE REVIEW(CONTD)

 FDI seen as most important resources for economic development of country in which nation are facing huge resource gap and it need outside capital to fulfil the gap, those inflows of capital from privet sector. It encourage to competitiveness, innovation and productivity, it significantly helps to earn more revenue, skills and technology transfer and increase in foreign exchange earnings. FDI normally involve sum of equity capital, other long-term and short-term capital as shown the balance of payments.  According to (Khawar, M. 2005) examines the impact of foreign direct investment on growth in the period using the method of ordinary least squares (OLS). The studies reveal that FDI is significant and positively correlated with growth as well as domestic investment.

 We used the Ordinary Least Squares (OLS) statistic technique method to measure the relationship between Remittance (REM), Capital (CAP), labor (L), Investment (INV), Inflection rate (INF), FDI and AID on the gross domestic product (GDP).  Considering the models and type of the data, Ordinary Least Squares (OLS) seems the most logical statistical technique to apply and it is well suited to this type of annually data. METHODOLOGY

INTERPRETATION OF EMPERICAL RESULTS Estimated Correlation Matrix of Variables ******************************************************************************* CAP INV L FDI INF REM CAP INV L FDI INF REM *******************************************************************************

Ordinary Least Squares Estimation ****************************************************************************** Dependent variable is CAP 45 observations used for estimation from 1970 to 2014 ****************************************************************************** Regressor Coefficient Standard Error T-Ratio[Prob] C [.000] INV [.763] L.1765E E [.000] INF [.711] REM [.000] AID [.090] FDI [.000] ****************************************************************************** R-Squared R-Bar-Squared S.E. of Regression F-stat. F( 6, 38) [.000] Mean of Dependent Variable S.D. of Dependent Variable Residual Sum of Squares Equation Log-likelihood Akaike Info. Criterion Schwarz Bayesian Criterion DW-statistic ******************************************************************************

 The OLS result shows that there were some variables which has inconsistences and later on in the research some of this variables (FDI, AID, INV and INR ) where removed due to policies and crisis happening in Nepal.  According to (Griffin, 1970; Rajan & Subramanian, 2008) foreign aid does not foster to economic growth instead, foreign aid will decelerate growth by letting down domestic saving rate. (Burnside & Dollar, 2000) argue that aid does not contribute to economic growth unless country has favourable policy exists. METODOLOGY(CONTD)

 Due to non-significance of some of the variables which were removed. using the parsimonious model method which is a model that accomplishes a desired level of explanation or prediction with as few predictor variables as possible. The other variables where estimated using the Ordinary Least Square (OLS) which gave a better result. METODOLOGY(CONTD)

INTERPRETATION OF EMPERICAL RESULTS 2 Estimated Correlation Matrix of Variables ******************************************************************************* CAP L REM FDI CAP L REM FDI *******************************************************************************

Ordinary Least Squares Estimation ****************************************************************************** Dependent variable is CAP 45 observations used for estimation from 1970 to 2014 ****************************************************************************** Regressor Coefficient Standard Error T-Ratio[Prob] C [.000] L.1751E E [.000] REM [.000] FDI [.000] ****************************************************************************** R-Squared R-Bar-Squared S.E. of Regression F-stat. F( 3, 41) [.000] Mean of Dependent Variable S.D. of Dependent Variable Residual Sum of Squares Equation Log-likelihood Akaike Info. Criterion Schwarz Bayesian Criterion DW-statistic ******************************************************************************

INTERPRETATION OF EMPIRICAL RESULTS From the result shown above, we can write the following regression equation GDP = (L) (REM) (FDI) t-statistic (49.93) (17.49) (5.72) These results indicates that for 1 unit increase in foreign direct investment will bring about increase in the GDP, 1 unit increase in remittance will bring about 2.08 increase in the GDP and 1 unit increase in labor will bring about 0.17 increase in the GDP.

TEST OF SIGNIFICANCE OF PARAMETER ESTIMATES H 0 : b=0 ( Not significant relationship) H 1 :  1  0 ( Significant relationship ) df = 42 At 5% significance level, we have as critical value. We can conclude that:  The labor (L) has a positive t-ratio greater than Therefore, we reject the null hypothesis and accept the alternative hypothesis that there is in fact a significant relationship between labor (L) and GDP. It has a positive impact on GDP.

TEST OF SIGNIFICANCE OF PARAMETER ESTIMATES (CONTD)  The remittance (REM) has a positive t-ratio greater than Therefore, we reject the null hypothesis and accept the alternative hypothesis that there is in fact a significant relationship between remittance (REM) and GDP. It has a positive impact on GDP.  The foreign direct investment (FDI) has a positive t-ratio greater than (critical value). Therefore, we reject the null hypothesis and accept the alternative hypothesis that there is fact a significant relationship between the foreign direct investment (FDI) and Gross domestic product (GDP), and it has a positive impact on GDP.

F-STATISTIC  F statistic is used to test the hypothesis that the variation in the independent variables (REM, L, FDI) shows a significance level of the variation in the dependent variable (GDP).  Therefore we can use the F statistic to test if all the regression coefficients will or will not equal zero. We can conclude that the regression equation is significant where F = (.000)

DURBIN-WATSON STATISTIC The DW (1.3392) falls between 0 and DL= and DU= Therefore, we reject the null hypothesis of no autocorrelated errors. Instead of this we accept alternative hypothesis of a positive autocorrelation. It means that the residuals (errors) are autocorrelated. H 0 : No autocorrelation (error terms are independent) H 1 : There is autocorrelation (error terms are not)

CONCLUSION, RECOMMANDATION & POLICY IMPLICATION The main substantive finding is that such contribution of foreign direct investment is superior and as well remittances. Moreover, international remittances prove to be a greater contributor of economic growth than ODA.  Generate favorable FDI policies and trade openness for the host countries.  Policymakers should create policies transparent enough for potential investors before using other measures for attracting higher levels of FDI.  In order to improve the quality of freedom of exchange, policymakers should place more efforts to reduce tax, tariff and non-tariff trade barriers to allow imports of intermediate inputs.

CONCLUSION, RECOMMANDATION& POLICY IMPLICATION (CONTD)  Government needs to improve regulations governing business activities by easing the process of business startups, reducing government bureaucracy, price control and other rent-seeking activities.  Associations and encourage their membership to remit and invest in their home countries.  Improving access to and use of financial services; this would certainly bring positive effects.  Remittances to the formal financial channels  Providing reliable information to migrants on transfer services and their costs  Providing incentives to migrants not only to remit, but also to save and invest