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ACADEMICIA
A n I n t e r n a t i o n a l
M u l t i d i s c i p l i n a r y
R e s e a r c h J o u r n a l
(Doubl e B l i nd Ref ereed & P eer Revi ew ed Journal )
DOI:
10.5958/2249-7137.2021.00195.6
FOREIGN DIRECT INVESTMENT AND ITS IMPACT ON
MACROECONOMIC VARIABLES, INVESTMENT POLICY IN FRANCE:
IMPLEMENTING INVESTMENT FRAMEWORK OF FRANCE IN
UZBEKISTAN
Nozim Muminov*; Jakhongir Tursunov**; Zilola Urozalieva***;
Marufjon Nematjonov****
*PhD in Economics,
National University of Uzbekistan under Mirzo Ulugbek,
UZBEKISTAN
**PhD in Economics,
Tashkent Institute of Finance,
UZBEKISTAN
***Student,
National University of Uzbekistan under Mirzo Ulugbek,
UZBEKISTAN
****Student,
Tashkent Institute of Finance,
UZBEKISTAN
ABSTRACT
This research is conducted to describe the impact of Foreign Direct Investment (FDI) on several
macroeconomic variables such as sustainable economic growth (GDP growth), unemployment
rate(U), export (EXP) and trade openness (TO) in France and studying investment policy in
order to use some effective methods in Uzbekistan.
KEYWORDS:
Foreign Direct Investment, Economic Growth, Sustainable Development,
Unemployment, Inflation, Export, Trade Openness, Globalization, Empirical Data, Coefficient
Of Determination, T-Statistics, F-Statistics, Ordinary Least-Squares Method, Regression Model,
Response Variable, Explanatory Variable.
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INTRODUCTION
Foreign Direct Investments play a significant role in the sustainable development of every
country‘s economy because it is crucial for the much-needed industrialization in the country. FDI
not only accelerates the path of industrialization, fosters and maintains economic growth but also
reduces unemployment rate. Globalization is making countries to become integrated and to open
up free trade. In this context, globalization provides an unparalleled opportunity for developing
countries to foster and achieve economic growth through trade and investment (Arndt 1999).
Hence, many countries—especially the least developed countries—are implementing liberal
economic policies to encourage more capital inflows from developed countries (Bengoa and
Sanchez-Robles 2003). Numerous scientists assert that the role of transnational corporations in
the development of Foreign Direct Investments and globalization has valid grounds for being
considered (Muminov 2020).On top of that according to a study conducted by EY, France was in
2020 the largest Foreign Direct Investment recipient in Europe, ahead of the UK and Germany.
EY attributed this as a direct result of reforms of labour laws and corporate taxation, which were
well received by domestic and international investors like‖.
1
Today, the importance of FDI has increased in the form of technology transfer and market
networks that can result in efficient production and sales globally (Lipsey and Sjöholm 2010;
Urata 1998). Foreign investors benefit by utilizing their assets and resources efficiently through
FDI, while the recipients are expected to benefit by securing technologies and becoming
involved in international trade networks (Louzi and Abadi 2011). Analyzing the investment and
innovations separating them into extensive and intensive investment and innovations has not
only great theoretical but also practical importance (Rasulev 2017).
FDI is often considered to be an important vehicle for economic growth (Vu Le and Suruga
2005a, b). A vast majority of empirical studies have focused on the effect that FDI may exert on
economic growth along with the causal link from FDI to growth. As noted by Chakraborty and
Basu (2006), however, the causal link from economic growth to FDI and the feedback
relationship deserve further attention. Therefore, the direction of this relationship between FDI
and economic growth needs to be stressed because the FDI-related spillover effect of knowledge
encourages economic growth, which, in turn, attracts more FDI (Chakraborty and Basu 2006).
Empirical studies, such as Vu Le and Suruga (2005a, b), Durham (2004), Borensztein et al.
(1998), and Balasubramanyam et al. (1996), have investigated the FDI-growth nexus. They have
stressed that the possibility of a positive impact of FDI on economic growth depends on such
mechanisms as the technology-upgrading progress, human capital investment, absorptive
capacity, and trade policy adopted by the host country (Gönel and Aksoy 2016; Katircioglu2009;
Silajdzic and Mehic 2016). These studies generally considered a panel of countries, suggesting
that FDI can have a positive effect on economic growth.
I. Foreign Direct Investments: a theoretical overview:
A foreign direct investment (FDI) is an
investment in the form of a controlling ownership in a business in one country by an entity based
in another country.
2
Foreign direct investments are commonly made in open economies that offer
a skilled workforce and above-average growth prospects for the investor, as opposed to tightly
regulated economies. Foreign direct investment frequently involves more than just a capital
investment. It may include provisions of management or technology as well. The key feature of
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foreign direct investment is that it establishes either effective control of or at least substantial
influence over the decision-making of a foreign business.
Foreign direct investments can be made in a variety of ways, including the opening of a
subsidiaryor associate company in a foreign country, acquiring a controlling interest in an
existing foreign company, or by means of a merger or joint venture with a foreign company.
The threshold for a foreign direct investment that establishes a controlling interest, per guidelines
established by the Organisation of Economic Co-operation and Development (OECD), is a
minimum 10% ownership stake in a foreign-based company. However, that definition is flexible,
as there are instances where effective controlling interest in a firm can be established with less
than 10% of the company's voting shares.
3
FDI represent an international strategy to grasp an opportunity outside the country; the choice to
undertake an investment into a foreign country through FDI is determined by several
determinants. One of the main reasons for undertaking this kind of investment is represented by
the acquisition of particular resources not available at home or feasible at higher prices; this
category is the so-called resource seeking. Moreover, a firm may want to invest abroad to gain
market access in order to locate near to the customer base or to avoid the costs of serving a
market on distance.
Furthermore, FDI allows taking advantage of differences in the availability and costs of factor
endowments, the so-called market seeking motive. Hence FDI, especially in case of broad
participation, provides extensive access to management policies, strategies, resources. Firms also
choose FDI when the business is related to complex technology or when there is a risk of
leakages of technology. As illustrated by the table among the economic determinants, the
efficiency-seeking can be another driver of FDI; indeed, there also other input costs as
communication and transport costs, that may affect and determine foreign direct investments.
TABLE 1.1 HOST COUNTRY DETERMINANTS OF FDI
Host
country
determinants
Types
of
FDI
classified
by
motives of TNCs
Principal
economic
determinants
in
host
countries
I. Policy framework for
FDI
economic,
political
and social stability
rules regarding entry
and operations
standards of treatment
of foreign affiliates
policies of functioning
and
structure
of
markets ( especially
competition and M&A
policies)
A.Market-
Seeking
market-size and per capita
income
market growth
access to regional and
global markets
country–specific
consumer preferences
structure of markets
B.Resource/asset-
seeking
raw materials
low-cost unskilled labour
skilled labour
technologica, innovatory
and other created assets
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Figure 1: FDI determinants – UNCTAD
II. Data and Methodology:
In this empirical analysis, the variables utilized are FDI
inflows(FDI), inflation rate (INF), economic growth (GDP), trade openness (TO), Export (EXP)
and unemployment rate (U) in France. The variables of FDI, GDP, TO,EXP consist of yearly
data spanning between 1980 and 2018, with 39 observations while unemployment rate consists
of yearly data between 1991 and 2018, with 28 observations. Trade openness is calculated as the
share of exports of goods and services (constant 2010 US $) in GDP (constant 2010 $).Inflation
in this analysis is measured by the consumer price index which reflects the annual percentage
change in the cost to the average consumer of acquiring a basket of goods and services that may
be fixed or changed at specified intervals, such as yearly.
.In this study, all variables are obtained from the World Bank Database.
The analysis is conducted in OLS (Ordinary Least-Squares) method.
4
Our regression models
include two variables, namely, response variable and one explanatory variable:
1.GDP=
a
𝟎
+
𝐚
𝟏
*FDI+
𝛆
𝐢
2.TO=
b
𝟎
+
𝐛
𝟏
*FDI+
𝛆
𝐢
International
agreements on FDI
privatization policy
trade policy ( tariffs
and
NIBs)
and
coherence of FDI and
trade policies
tax policy
II.
Economic
determinants
III. Business facilitation
investment promotion
(including
image-
building
and
investment-generating
activities
and
investment-facilitation
services)
investment incentives
hassle costs (related to
corruption,
administrative
efficiency, etc.)
after-investment
services
(e.g.
brand
names),
including as embodled in
individuals,
firms
and
clusters
physical
infrastructure
(ports,
roads,
power,
telecommunication)
C.
efficiency-
seeking
cost of resources and
assets listed under B,
adjusted for productivity
for labour resources
other input costs, e.g.
transport
and
communication
costs
to/from and within host
economy and costs of
other
intermediate
products
membership of a regional
integration
agreement
conducive
to
the
establishment of regional
corporate networks
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3.EXP=
d
𝟎
+
d
*FDI+
𝛆
𝐢
4.U=
g
𝟎
+
𝐠
𝟏
*FDI+
𝛆
𝐢
They can be written as:
𝐲
𝐢
= β
𝟎
+
𝛃
𝟏
*
𝐱
𝐢
+
𝛆
𝐢
(1)
Here,
𝛆
𝐢
is the error term for observation i since it contains all factors affecting
𝐲
𝐢
other than
𝐱
𝐢
.
III.The impact of foreign direct investment on macroeconomic variables in France
TABLE1. DESCRIPTIVE STATISTICS
Variables
t
0
statistics
t
1
-
statistics F-statistics
R-
squared
adjusted
R
squared
GDP=1797782.248+15.873*FDI
22.17
6,6
43,56
0,54
0,53
TO=22.22+0.00012*FDI
32.4
5,66
32,05
0,46
0,45
EXP=300299.63+8.12*FDI
6.85
6,250
39,06
0,51
0,50
U=11,6+(-5,04E-05)*FDI
22.98
-3.956
15.65
0,38
0,35
Source: Authors ̒ compilation with Excel
Foreign Direct Investments are the driving force behind the economic growth. Although FDI
cannot bring the GDP growth immediately, it can show its result after a few years due to
investment lag. According to this analysis, the coefficient of determination ( R2) between GDP
growth and FDI inflows is 0.54 meaning that FDI inflows have significant impact on GDP
growth. Critical value of t-student is 2.03(for a 5 % level test and with n-k-1=36 degrees of
freedom) . The true value of
t
0
-statistics is 22.17 and
t
1
-statistics is 6.6. Due to 6.6> 2.03,
β
1
(15.873 in our model) shows the real impact of FDI on GDP growth and 22.17>2.03, β
0
(1797782 in this model) shows the impact of other factors on GDP growth . The critical value of
F- statistic is 4.11 and the true value of it is 43.56. 43.56>4.11 and it is obvious from this that
the model is significant at the 5 % significance level.
As for the regression model between trade openness and foreign direct investment inflows, the
coefficient of determination (R2) is 0.46 meaning that FDI inflows have a dramatic influence on
TO. The critical value of t-statistic is 2.03 (for a 5 % level test and with n-k-1=36 degrees of
freedom) . The true value of
t
0
-statistics is 32.4 and
t
1
-statistics is 5.66 meaning thatβ
1
(0.00012
in our regression model) and β
0
(22.22 in this model) are significant at the 5 % significance level.
The critical value of F-statistic is 4.11 and true value of it is 32.05. Owing to 32.05>4.11, the
model is significant at 5 % significance level.
As to the regression model of FDI inflows and export, the coefficient of determination is 0.51
meaning that the explanatory power of the model is slightly strong with the independent variable
explaining 51 % of the movement in the dependent. The critical value of t-statistic is 2.03 (for a
5 % level test and with n-k-1=36 degrees of freedom) The true value of
t
0
-statistics is 6.85 and
t
1
-statistics is 6.25 meaning that β
1
(8.12 in our regression model) and β
0
(300299.63 in this
model) are significant at the 5 % significance level. The critical value of F-statistic is 4.11 and
true value of it is 39.6. Owing to 39.06>4.11, the model is significant at 5 % significance level.
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FDI inflows result in reduction of unemployment rate. The coefficient of determination 0.38
meaning that the independent variable of FDI inflows explains 38 % of the movement in the
dependent variable of unemployment. The critical value of t-statistic is 2.06 ( For a 5 % level test
and with n-k-1=26 degrees of freedom) while The true value of
t
0
-statistics is 22.98 and
t
1
-
statistics is -3.956.β
1
(-5,04E-05 in this model) and β
0
(11.6 in this model) are significant at 5 %
significance level.The critical value of F-statistic is 4.11 and true value of it is 15.65. Owing to
15.65>4.11, the model is significant at 5 % significance level.
IV. France‟s investment framework: implementing its methods in Uzbekistan:
Why France
attracts foreign investors is that tertiary fabric(including tourism) is highly developed, it has a
vast industrial base, skilled and productive workforce being2nd European country in terms of
hourly productivity and most importantly France has an investment-friendly business
environment and relatively stable and transparent legal framework.
5
The Government of France
have made many reforms to revitalize the economy in the country and to attract more investors.
To illustrate, administrative formalities to establish foreign companies have been relaxed.
Another stimulant is that the same subsidies are provided for foreign companies as French
companies meaning that foreign companies can have more financial resources for R&D, to
employ more skilled workers and improve their staff‘s both vocational and professional
qualifications. Moreover, there are a number of organizations that improve business environment
in France such as Business France which is an investment aid agency supporting the international
development of the French economy.
It is clear from these observations that Uzbekistan can also enhance its business environment and
attract foreign investors by introducing flexible regulations on companies which have foreign
investment due to the fact that frequent amendments to laws also affect adversely the attitudes of
investors towards the business environment in the country. Another pressing issue that should be
paid more attention is the qualification and skills of human resources. This is the important factor
for the development of every company and urges investors to invest their financial resources.
Foreign Direct investment inflows to France fluctuated over the 40 years from 1980 and 2019.
However, if FDI net inflows in 2019 is compared to the quantity in the past period, for example
in 1980 and 1990, it can be seen that it increased dramatically from 3282.77 mln US dollars in
1980 and 13183.29 mln US dollars in 1990 to 51038.71mln US dollars in 2019.(Figure2)
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Figure2. Foreign Direct Investment net inflows from 1980 to 2019 in France.
According to the World Investment Report 2020, published by UNCTAD, FDI flows to France
decreased by 11% to reach USD 34 billion (compared to USD 38 billion in 2018). This was
mainly due to a decline in cross-border M&A sales of assets. France is the 13th recipient of FDI
in the world. According to the Global Investment Trend Monitor published by UNCTAD, France
was the 4th country receiving FDI flows during the first half of 2019, receiving USD 33 billion
in FDI. Luxembourg, the Netherlands, the United Kingdom and Switzerland are the main
investors in France and represent more than 50% of the stock of FDI.
Foreign Direct Investment in France in 2020 (monthly, EUR million)
Source: TRADINGECONOMICS.COM| BANQUE DE FRANCE
1000
11000
21000
31000
41000
51000
61000
71000
81000
91000
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
Foreign direct investment, net inflows (current
mln US$) from 1980 to 2019
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Foreign Direct Investments have suffered as a result of the coronavirus pandemic. While Foreign
Direct Investments constituted 5113 million euros in December in 2019, it decreased sharply to -
6524 million euros in January, -7326 million euros in February and finally -7645 million euros in
March when lockdowns were by far the most strict than following months. It began to go up
again in April when lockdowns started being relaxed. Foreign Direct Investments in France
increased by 2337 million euros in October,2020.
CONCLUSION AND RECOMMENDATIONS:
This study conducted an empirical analysis
of FDI inflow‘s impact on on macroeconomic variables of GDP growth, inflation rate,
unemployment rate, trade openness and export in France. From this research, it is obvious that
there is a long-run relationship between these indicators. Due to the fact that there is a positive
relationship between FDI inflows and economic growth, the country should embrace more
investment to its economy. In this way, more population in the country can be provided with
employment resulting in decrease in unemployment rate because unemployment rate is high at
10.4 % in 2020 according to IMF and this adversely affects young people and older workers.The
analysis has also shown that there is a negative relationship between FDI inflows and
unemployment rate. FDI inflows not only create opportunity to open up new businesses and
enlarge companies increasing the quantity of goods produced in the country but also promotes
innovations which serve to make the country‘s products competitive in the world market. The
level of SMEs operating for export and investing in innovations is low in the country. Therefore,
increase in FDI inflows to the country can have positive effects on its economy.There is a
positive correlation between exports of goods and services and FDI inflows according to this
study as well.
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