BUSINESS-CYCLE ASYMMETRY AND CAUSALITY BETWEEN FOREIGN DIRECT INVESTMENT AND FIXED CAPITAL FORMATION

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1 Economc Polcy n he Wake of he Crss BUSINESS-CYCLE ASYMMETRY AND CAUSALITY BETWEEN FOREIGN DIRECT INVESTMENT AND FIXED CAPITAL FORMATION Kuan-Mn Wang, Yuan-Mng Lee and Thanh-Bnh Nguyen Th ) Dearmen of Fnance, Overseas Chnese Unversy, Tawan ) Dearmen of Fnance, Souhern Tawan Unversy, Tawan ) Dearmen of Accounng, Chaoyang Unversy of Technology, Tawan Absrac Ths sudy creaes he hreshold vecor auoregresson model and emloys quarerly daa of Tawan from o o examne he relaonsh beween foregn drec nvesmen (FDI) and domesc gross drec nvesmen (GDI). Our framework rovdes a consderaon of busness cycle asymmery ha que dffers from he exsng aroach. We fnd ha () he long-run relaonsh beween FDI and GDI s comlemenary; () he relaonsh beween FDI and GDI s subsuve durng exanson, however, s comlemenary durng recesson; () a derecaon of he Tawanese Dollar hels arac FDI durng exanson, bu decrease GDI durng recesson; () he negave mac of Tawan s ouward foregn drec nvesmen and naonal savng on GDI, he negave mac of GDP on GDI and he negave mac of Tawan s ouward nvesmen on FDI are only evden durng recesson; and (5) macroeconomc varables ndrecly affec FDI durng exanson and GDI durng recesson hrough he adjusng rocess oward equlbrum. Keywords: foregn drec nvesmen, gross drec nvesmen, curren deh of recesson, Threshold model JEL Classfcaon: C, F, F Inroducon FDI lays a very moran role n fuelng economc growh. One of he ways of lookng a he moran of FDI nflows n an economy s o exress hem as a ercenage of gross fxed caal formaon. Gross fxed caal formaon summarzes he oal amoun of caal nvesed n offce buldngs, facores, sores, and he lke. Oher hngs beng equal, he greaer he caal nvesmen n an economy, he more favorable s fuure growh rosecs are lkely o be. Vewed hs way, FDI can be regarded as an moran source of caal nvesmen and a deermnan of he fuure growh rae of an economy. Corresondng auhor, Kuan-Mn Wang - wkmnn@ocu.edu.w Secal Number November

2 Busness-Cycle Asymmery and Causaly Beween Foregn Drec Invesmen and Fxed Caal Formaon In recen arcle, Choe () nvesgaes he causaly beween he economc growh and FDI, and beween he economc growh and he gross domesc nvesmen (GDI) wh he daa of counres from 7 o 5. e fned a sgnfcan b-drecon Granger cause beween economc growh and FDI, and jus an undreconal Granger cause beween economc growh and GDI. These fndngs are valuable; however, do no clearly denfed he roles of FDI and GDI n economc growh. Ths sudy ams o fnd a new emrcal aroach o fll hs ga and res o answer he queson wheher he relaonsh beween FDI and GDI s comlemenary or subsuve wh Tawanese daa. Examnng he behavors of he FDI/GDP and he GDI/GDP raos, deced grahcally n Fgure no., he rgh vercal axs measures he FDI/GDI rao and he lef vercal axs measures GDI/GDO rao. We see ha FDI/GDP rao ncreased from.% n o.5% n ; he rao reduced o.% n 5 bu jumed o more han % n. As o he erformance of he GDI/GDP rao, decreased from % n o % n. In and, he rao droed dramacally because of he worldwde recesson. Alhough hs rao ncreased n, was jus abou 7% snce he whole nvesmen level was already reduced... F D I / G D P G D I / G D P Fgure no. : Behavors of he FDI/GDP and he GDI/GDP raos I s common knowledge ha whaever he resources are, an ncrease of nvesmen has sgnfcan benefs o he economc growh. Conrarly, a decrease of nvesmen has negave macs no only n he shor-run bu also n he long-run economc erformance of one counry. Therefore, s necessary o nvesgae he facors affecng he nvesmen n Tawan, esecally he relaonsh beween GDI and FDI. The fndngs from hs analyss are hoed o be an moran reference for he governmen n secfyng nvesmen relaed olces. Fgure no. shows ha he FDI/GDP and he GDI/GDP raos are negavely correlaed before, osvely correlaed from o, negavely correlaed agan from o, and osvely correlaed once more from o. The changes of he relaonsh beween hese wo raos ndcae nonlneary beween hem, and hs characersc should be consdered n he relaed emrcal sudes. To amly undersand he relaon beween FDI and GDI, some macroeconomc varables are furhermore ncluded n our emrcal model for makng our resuls more robus. Amfearu Economc

3 Economc Polcy n he Wake of he Crss There are rarely revous sudes ha jus examne he relaonsh beween FDI and GDI. Mos arcles nclude oher varables, n addon o FDI and GDI, o exlore he relaonsh among hem. Wald and Pauly () ulze he Jorgenson heory o esmae he nvesmen funcon of Canada. Usng daa from o 5, he auhors fnd ha FDI and GDI are osvely correlaed, ndcang he negave affec of a decrease of FDI on GDI. The auhors also fnd ha he Canadan ouward foregn drec nvesmen (FDIO) s osvely correlaed wh GDI, showng he osve effec of an ncrease of FDIO on GDI. owever, Feldsen (5) exlores U.S. nvesmen and fnds ha an ncrease of U.S. FDIO would decrease U.S. GDI. In order o avod he omed varable roblem wh economerc aroach, Desa e al. () aly boh macroeconomc and cororae anel daa on he model ha no only ncludes all varables used n Feldsen (5) bu also adds one new varable of execed economc growh. I s found ha an ncrease of FDIO has a sgnfcan osve mac on GDI. Ths resul s no conssen wh he fndngs of Feldsen (5). Roedegebuure () uses survey daa across cororaons durng o o nvesgae he relaon beween FDIO and GDI. The auhor caegorzes echnology frms no hree dfferen levels- hgh, medum and low- accordng o he defnon secfed by OECD (Organzaon for Economc Cooeraon and Develomen). The Kruskal Walls es of non-aramerc analyss s aled o examne wheher here exss dfferen characerscs among he frms. When Pearson s furher ulzed o analyze he relaonsh beween FDIO ncrease and R&D exenses, s found ha hs relaon s osve. The sewse regresson resuls also sugges ha nernaonalzaon hels he ncreases n domesc R&D exenses of hgh echnology frms, conformng wh execaon. As o he relaon beween FIDO and GDI, s found a slgh osve relaon beween hem. The reason may be ha mos comanes move he roducon secors o overseas counres for reducng he roducon cos. Ths behavor may offse her osve relaonsh. Klen and Rosengren (), Bayoum and Lworh (), and Kyoa and Uraa () fal o oban he conssency n fndngs of he mac of he exchange rae on FDI. Froo and Sen (), Dewener (5), Cho and Jeon (7) exlore he nfluence of he exchange rae on FDIO and fnd dfferen resuls. Cho and Jeon (7) emloy he dynamc me seres analyss o nsec he macs of fnancal varables on FDIO n four larges ndusral counres. They fnd ha FDIO s a non-saonary varable and has a longrun relaonsh wh he real exchange rae, and ha here s a causal effec of he exchange rae on drec nvesmen n he shor run. Invesgang he deermnan affecng he FDI of Malaysa, Ang () fnds ha real GDP has a sgnfcanly osve mac on FDI nflows, whch s conssen wh he redcon of he marke sze hyohess. In addon, GDP growh rae has a small osve effec on nward FDI. These fndngs sugges ha hgher develomens n he fnancal secor, nfrasrucure, and rade oenness all hel romoe FDI; on he conrary, hgher sauory cororae ax and real exchange rae arecaon dscourage FDI nflows. The surrse s ha hgher macroeconomc uncerany seems o hel nduce more FDI nflows. The economc leraure has yelded a large number of n-deh sudes concernng he relaon beween naonal nvesmen and savng, such as Dar e al. (), Jansen (), De Va and Abbo (), Pelagds and Masroyanns (), Corbn (), and Chakrabar (). owever, hese researches manly focus on he correlaon beween Secal Number November 7

4 Busness-Cycle Asymmery and Causaly Beween Foregn Drec Invesmen and Fxed Caal Formaon gross naonal savng (GNS) and GDI and her resuls are no conssen. Ye hsorcally, relavely lle has been known abou he relaonsh beween GNS and FDI. The key ssue we address n hs aer s he mac of GNS on boh GDI and FDI, arcularly wh varables used n he revous sudes on FDI or GDI. I s known ha here may be a number of facors affecng he relaonsh beween hem, ncludng FDIO, GDP, GNS, and nomnal exchange rae (EX), whch are used as exogenous varables n our conex. Parcularly, he asymmerc effec aken no consderaon s he on of our sudy, whch s que dfferen from he revous sudes ha almos make he assumon of symmery. Accordng o Razn e al., (); Knosha and Mody () asymmerc nformaon s an moran facor conrbung o reference for FDI (or GDI) comared wh oher sources of fnancng. Ths s more obvous o economes characerzed by a general lack of ransarency, low sandards of busness conduc, and nadequae roecon of credor and mnory shareholder rghs. As a resul, Buer e al. () ons ou ha he foregn sraegc nvesor of comanes n ranson economes whch rely rmarly on FDI ake almos he majory conrol over he frm. Addonally, economc research rovdes varous evdences abou he mac of economy on nvesmen. Accordng o Desa e al. (), fuure economc develomen has crucal nfluence on nvesmen. owever, hs dscuss does no deely exlore he dfferen macs beween economc booms and recessons on nvesmens. Ang () argues ha he uncerany of fuure economc develomen s one of he major facors affecng FDI. Neverheless, he auhor models he uncerany wh he GARC model n a lnear esmaon, whch could no measure he asymmerc effec assocaed wh dfferen economc sauses. To boh foregn and domesc nvesors, he execaon of fuure economc growh would have crcal nfluence on her nvesmen decsons. The boom execaon wll enhance frms fuure rofs and may lead o an ncrease n boh FDI and GDI. Conrarly, he deresson execaon mles an decrease n fuure rofs or even losses and may lead o a reducon of boh FDI and GDI. Whle he wo economc sauses, exanson and recesson, mgh have a grea mac on one counry s FDI and GDI, here s no any emrcal evdence exss o dsngush beween hem. Therefore, hese wo economc sauses are recognzed as he resource of he asymmerc effec n hs sudy. In addon, Beaudry and Koo () desgn he ndcaor of Curren Deh of Recesson (CDR), whch measures he asymmery of he busness cycle. owever, hs CDR uses he exogenous sandard o evaluae he busness cycle saus, so he resuls could no acually ndcae he crcal on of he ranson of a busness cycle saus. In hs aer, we would lke o adjus hs CDR ndcaor and use he adjused CDR as a hreshold varable n our hreshold model. Snce he hreshold model endogenously deermnes he ranson ons, he esmaon resuls would be more accurae. The man queson we address s wheher he relaonsh beween FDI and GDI s subsuon or comlemen. Because he symmerc-lnear model ha s used by mos revous sudes mgh neglec he non-lneary caused by busness cycle saus, n addon o he use of four macroeconomc varables; FDIO, GDP, GNS, and EX., he nonlnearasymmerc ssue s also aken no consderaon o fnd an accurae answer. The rmary reason for us o add hose varables s o avod he so-called omed varable roblem. 7 Amfearu Economc

5 Economc Polcy n he Wake of he Crss The rocess of hs emrcal sudy ncludes fve ses. Frs, we examne he correlaons among FDI, GDI, and he four exogenous varables. Second, we lo he me seres of FDI and GDI o observe wheher he wo varables are nonlnearly correlaed. Thrd, we examne he exsence of he long-run relaonsh beween he wo varables. Fourh, we nsec he exsence of he shor-run non-lneary beween he wo arge varables (FDI and GDI) and he four exogenous varables. If boh he non-lneary and he conegraon do exs, we hen ulze he hreshold vecor error correcon model (TVECM) o roceed he shor-run dynamc analyss. Fnally, we es he asymmerc causaly o nvesgae he srong and weak exogenes among he varables. Our fndngs whn hs rocess could be summarzed as follows. Frs, we aly he Pearson correlaon coeffcen es and fnd ha he four exogenous varables are sgnfcanly correlaed wh boh FDI and GDI. Second, un roo es resul shows ha all he varables are I(). Ulzng he Johansen conegraon es, we fnd ha FDI and GDI are conegraed n he long run. In addon, we emloy he adjused CDR as a hreshold varable o dvde he model no wo regmes (he exansonary regme and he recesson regme) and use he TVECM esmaon o confrm he causaly of all he varables n he shor run. The esmaon resul suggess ha n he exansonary erod, FDI has a undreconal negave mac on GDI and he wo varables are characerzed by he subsue; n he recesson erod, FDI has a osve mac on GDI and he wo varables are comlemen. As o he macs of he exogenous varables on FDI and GDI, n he exansonary erod, only EX could osvely affec FDI, whch ndcaes ha he derecaon of Tawanese dollar (NTD) could arac FDI; n he recesson erod, FDIO and GNS have osve affecs on GDI, GDP and EX have negave macs on GDI, and FDIO has a osve mac on FDI. Analyzng he devaon from he equlbrum of he error correcon for denfyng he ndrec effecs of he exogenous varables on FDI and GDI, we fnd ha n he exansonary erod, all he exogenous varables could ndrecly affec FDI, and n he recesson erod, all he exogenous varables could ndrecly mac GDI. These resuls mean ha FDI s affeced by all he exogenous varables hrough he error correcon n he exansonary erod, conrarly, GDI s affeced n he recesson erod. The remander of hs aer s organzed as follows. Secon deals he research mehodology, he daa, he summary sascs and he emrcal model. The emrcal fndngs are dscussed n Secon, and Secon concludes hs aer.. Research mehodology In hs secon, we resen he varable descron and examne he correlaon among he varables as well as he nonlnear characersc of FDI and GDI. When he nonlneary of FDI and GDI are confrmed, we hen ulze he asymmerc busness cycle ndcaor as our hreshold varable o consruc he hreshold model. Secal Number November 7

6 Busness-Cycle Asymmery and Causaly Beween Foregn Drec Invesmen and Fxed Caal Formaon. Daa descron and correlaon analyss The endogenous varables ncludng FDI and GDI and he exogenous varables coverng FDIO, GDP, GNS, and EX are reored n Table no.. Table no. : Varable Descron Varable Descron Un FDI Foregn drec nvesmen Mllon NTD FDIO Ouward foregn drec nvesmen Mllon NTD GDI Fxed caal formaon Mllon NTD GDP Gross domesc roduc Mllon NTD GNS Gross naonal savng Mllon NTD EX Nomnal exchange rae (NTD/US $) Noe: Exce for he exchange rae, all oher varables are n real erms. We ake logarhms of all he varables before conducng all he ess. The samle erod sreads from he frs quarer of o he fourh quarer of wh observaons. All he daa s obaned from he daabank of Drecorae-General of Budge, Accounng, and Sascs, Execuve Yuan, R.O.C. (Tawan). Exce for he exchange rae, all oher varables are n real erms. We ake logarhms of all he varables before conducng all he ess. Fgure no. grahs he me seres of varables. 7 Amfearu Economc

7 Economc Polcy n he Wake of he Crss Secal Number November 7 Fgure no. : Tme seres of all varables I s seen ha exce for EX, he values of he res varables are ncreasng over me. FDI and FDIO have larger flucuaons; FDIO was more flucuan before and less aferwards. I seems ha GDI and GNS may have quarerly flucuaons. As o he behavor of EX, he Tawanese dollar hghly arecaed n he s and derecaed afer he 7 Asan fnancal crss. To asceran he macs of he four exogenous varables on FDI and GDI, we frs emloy he Pearson correlaon coeffcen o conduc he arwse correlaon es and reor he es resuls n Table no F DI GDI GDP GNS EX 5 7 FDI O

8 Busness-Cycle Asymmery and Causaly Beween Foregn Drec Invesmen and Fxed Caal Formaon Table no. : Pearson correlaon coeffcen es Varable GDI GDP GNS FDIO EX FDI.7***.77***.7***.7*** -.5*** GDI.5***.5***.*** -.*** Noe: The null hyohess of he es s ha he corresondng correlaon coeffcen equals. *** ndcaes he % sgnfcance. The four exogenous varables sgnfcanly correlaed wh FDI and GDI, whch ndcaes ha he ncluson of hese exogenous varables n he model may hel o fnd he rue relaonsh beween FDI and GDI. The coeffcens reored n Table also on ou ha FDI and GDI are osvely correlaed wh he exogenous varables, exce for EX. Ths means ha, whou he consderaon of any oher nformaon, he derecaon of NTD would reduce he nvesng ncenve of boh foregners and he domesc frms. The resuls n Table are vewed as a relmnary examnaon of he correlaons among varables under symmerc condon, he more accurae correlaon analyss wh asymmerc consderaon should be done hrough sysemac ess.. The nonlneary of varables Before conducng he nonlnear esmaon, we ulze he Scaer wh Neares Neghbor F and he Scaer wh Kernel F mehods o lo he fed lnes of FDI and GDI o examne he nonlnear characerscs of hese wo varables. In he Scaer wh Neares Neghbor F mehod, he bandwdh san deermnes whch observaons should be ncluded n he local regressons, and he san conrols he smoohness of he local f. The olynomal degree secfes he degree of olynomal o f n each local regresson. Symmerc neghbors force he local regresson o nclude he same number of observaons o he lef and o he rgh of he on beng evaluaed. The Robusness eraons oon carres ou a form of weghed leas squares where oulyng observaons are gven relavely less wegh n esmang he coeffcens of he regresson. The resul of he Scaer wh Neares Neghbor F mehod s lsed n Fgure no.. The Scaer wh Neares Neghbor F mehod dslays local olynomal regressons wh bandwdh based on neares neghbors. Brefly, for each daa on n a samle, a locally weghed olynomal regresson s fed frs. I s a local regresson snce he observaons used are a subse of observaons lyng n a neghborhood of he on o f he regresson model; s weghed so ha observaons furher from he gven daa on are gven less wegh. Ths class of regressons ncludes he oular Lowess (also known as Lowess) echnques descrbed by Cleveland (, ). Addonal dscusson of hese echnques may be found n Fan and Gjbels (), and n Chambers e al. (). As o he Scaer wh Kernel F mehod, dslays fs of local olynomal kernel regressons of he second seres n he grou Y on he frs seres n he grou X. Boh he neares neghbor f, descrbed above, and he kernel f are nonaramerc regressons ha f local olynomals. The wo mehods dffer n how hey defne "local" n he choce of bandwdh. The effecve bandwdh n neares neghbor regresson vares, adang o he observed dsrbuon of he regressor. For he kernel f, he bandwdh s fxed bu he local observaons are weghed accordng o a kernel funcon. Exensve dscusson may be found n Smonoff (), ärdle (), Fan and Gjbels (). 75 Amfearu Economc

9 Economc Polcy n he Wake of he Crss G D I FDI Lowess Lnear F (san=.5, ers=) Lowess Lnear F (san=., ers=) Lowess Lnear F (san=.5, ers=) Fgure no. : Scaer wh Neares Neghbor F of FDI and GDI We use hree bandwdh sans:.5,., and.5; he olynomal degree s and he eraon number s, a secaon followng Cleveland (). I s very aaren ha FDI and GDI are nonlnearly correlaed n he hree bandwdh sans. Fgure shows he resul of he Scaer wh Kernel F mehod. In hs mehod, he kernel s he funcon used o wegh he observaons n each local regresson, and s secfed as a Cosnus funcon. In The Cosnus funcon s secfed as π π cos( u) I( u ),where u s he argumen of he kernel funcon and I s he ndcaor funcon ha akes a value of one, f s argumen s rue, and zero oherwse. Secal Number November 7

10 Busness-Cycle Asymmery and Causaly Beween Foregn Drec Invesmen and Fxed Caal Formaon Fgure no., we also emloy hree bandwdh (h):.,., and.. I s very obvous ha he relaonsh beween FDI and GDI s characerzed wh nonlneary as well G D I FDI Kernel F (Cosnus, h=.) Kernel F (Cosnus, h=.) Kernel F (Cosnus, h=.7) Fgure no. : Scaer wh Kernel F of FDI and GDI. The orgnal CDR and adjused CDR CDR, he ndcaor of busness cycle resened by Beaudry and Koo (), was orgnally emloyed o analyze he asymmery of busness cycles. Ths ndcaor could reresen wo economc saes: CDR = and CDR >. The former reresens he exansonary erod of 77 Amfearu Economc

11 Economc Polcy n he Wake of he Crss an economy, and he laer ndcaes he recessonal erod of he economy. The CDR equaon s secfed as follows: CDR = max Y s} s { Y () where Y s he ouu level of erod ; CDR s he ouu ga beween he hsorcal maxmum level of ouu (beween erod and erod s, he revous erod) and he ouu level a erod. Therefore, CDR > ndcaes ha he economc sysem breaks away he orgnal rend of economc growh, dslayng he recesson of busness cycle. Equvalenly, CDR = exhbs he exanson of busness cycle. Even f CDR could accuraely caure he recesson erods, sll needs o be modfed for wo reasons. Frs, CDR assgns o he exansonary erods so canno be ulzed no he hreshold esmaon. Second, snce CDR exogenously deermne he hreshold values, canno be aled o cross counry analyss or o a mulvarae hreshold model. Wh regard o he above menoned merfecons of he CDR ndcaor n equaon (), hs sudy would lke o revse o beer f our urose n he followng esmaons. The revsed framework also creaes he wo regmes of boh recesson and exanson and has wo benefs. Frs, he orgnal busness cycle values denfed by he orgnal CDR n equaon () could be reaned. Second, he exansonary erods ha could no be deeced by he orgnal CDR can now be recovered by our new CDR ndcaor. We name our adjused CDR as ACDR whose funcon form s saed n equaon (): ACDR = CDR STD CDR = CDR ( CDR µ CDR ) /N, () where CDR = max{ Y } Y ) = Y max{ Y } ; STD CDR ndcaes he sandard devaon of CDR; CDR observaons. ( s s> s µ s he mean of CDR; N s he number of. The Threshold model Tong (7) and Tong and Lm () develo he hreshold auoregressve (TAR) model based on an omal hreshold value ha dvdes he dynamc saus of one economc ndcaor no wo regmes. Takng no accoun he conegraon relaonsh beween FDI and GDI, we creae he TVECM o carry ou he esmaon. To adjus he shor-run dsequlbrum, TVECM, relave o TVAR, has only one dscreancy n he error correcon erm (ECT). The secfcaon of he TVECM s as follows: In order o avod he confusons caused by he oose sgns beween he adjused CDR values and busness cycle saes when exlanng he emrcal resuls, we secfy CDR as he adjused CDR mulled by -. In oher words, he osve and negave values of CDR corresond o he exanson erod (osve) and he recesson erod (negave) of busness cycles, resecvely. Secal Number November 7

12 Busness-Cycle Asymmery and Causaly Beween Foregn Drec Invesmen and Fxed Caal Formaon GDI FDI = = FDIO GNS FDIO GNS 5,,,,, GDI GDI 5, GNS GNS FDIO FDIO, FDI, 5,,, GDI,, GDI 5,,, FDI,,, GDP EX, GDP EX FDI,, FDI, EX, EX ω ω GDP GDP ω ω ECT ECT ECT ε ECT ε,, ε ε,, ACDR -d ACDR -d ACDR > γ γ -d ACDR where ndcaes he frs dfference; and are he arameers; ε, and ε, are he error erms; ACDR > γ ndcang an exanson, whle ACDR γ ndcang a -d recesson; ω, ω, ω and ω are he adjusng coeffcens of ECT - ; ECT s he error correcon erm of erod n he long-run equlbrum: ECT θ, (5) = GDI FDI where θ s he arameer of he conegraon equaon. -d > γ -d γ () () 7 Amfearu Economc

13 Economc Polcy n he Wake of he Crss In order o confrm he causaly of he shor-run dynamc effec, we emloy he Wald coeffcen es o deermne he causaly beween he varables (srong exogeney). In addon, we could verfy he weak exogeney hrough he sgnfcance of he adjusng coeffcens ( ω, ω, ω, and ω ) of he error correcon erm under dfferen regmes.. The Emrcal Resuls We sar our emrcal sudy wh he un roo es n order o clear u he saonary of all he varables. If he varables are I(), hen we emloy he Johansen (5) conegraon es, wh he consderaon of he mac of he exogenous varables (FDIO, GDP, GNS, and EX), o examne he conegraon beween FDI and GDI. If FDI and GDI are conegraed, a lneary es s aled o confrm ha he emrcal model could be used n he nonlnear framework. Tha s, f he null hyohess of lneary s rejeced, we hen esmae a nonlnear TVECM o analyze he shor-run dsequlbrum and conduc he causaly es. We emloy hree forms of un roo ess: Augmened Dckey-Fuller es (7, ADF), Ello e al. es (, DF-GLS), and Ng and Perron es (, NP-MZ a ). Snce he me seres n Fgure jus exhb he aaren me rends, s necessary o nclude boh he consan erm and he me rend n he regresson equaons of he un roo ess. In addon, he omal lag lengh of s seleced accordng o he Akake nformaon creron (AIC). The es resuls reored n Table no. show ha all he varables, under he % sgnfcan level, are I(). AD F DF- GLS NP-MZ a Level Frs dfferenc e Level Frs dfferenc e Level Frs dfferenc e Table no. : Un Roo Tess EX FDI FDIO GDI GDP GNS [ [] [] ] [] [] [] * -.* -.*.5**.**.** **[7] [7] **[7] *[] *[] *[7] -. [] -5.* **[] -. [] -.** *[] -.5 [] -.* **[] -. [ ] -.** *[] -.7 [] - 5.7** *[] -.5 [ ] -.* * [] -. [] -.* [7] -.5 [] -.** *[] -.7 [] -.* [7] -. [] - 5.** *[] -.5 [] -.* **[] -.75 [ ] -.** *[] Noe: The maxmum lagged erod s. The numbers n square brackes are he arorae lag lenghs seleced by he Akake nformaon creron n he ADF: Augmened Dckey-Fuller es, DF-GLS: Dckey-Fuller generalzed leas squares es, NP- MZa: Ng and Perron MZa es. The crcal values for % sgnfcan level of ADF, DF- GLS, and NP-MZ a ess are -.57, -.57, and -.5, resecvely; he crcal values for Secal Number November 7

14 Busness-Cycle Asymmery and Causaly Beween Foregn Drec Invesmen and Fxed Caal Formaon 5% sgnfcan level of he hree ess n he order are -.577, -., and -.7, resecvely; he crcal values for % sgnfcan level of he hree ess n he order are -., -7., and -., resecvely. Crcal values of he ADF and DF-GLS ess are from MacKnnon (). Crcal values of he NP-MZa es are from Ng and Perron ().The numbers n he arenheses [.] of ADF es are he lag lenghs seleced by alyng AIC. ***, **, and * denoe he sgnfcance a %, 5% and % level, resecvely. Table no. lss he resuls of omal lag lenghs for he VAR model and we selec he maxmum of erods for esng. In order o have alernave selecons for he omal lag, we emloy hree crera, ncludng he Fnal redcon error (FPE) creron, AIC, and he Schwarz nformaon creron (SC). I s found ha he omal lag lengh s. Therefore, hs sudy ados he lag lengh of o es for conegraon as well as o esmae he model. Table no. : Lag Selecon for VAR Model Lag FPE AIC SC NA **.** -.** Noe: FPE exresses he fnal redcon error, AIC s he Akake nformaon creron, SC denoes he Schwarz nformaon creron, ** denoes he 5% sgnfcan level. The resuls of Johansen conegraon es are reored n Table no Amfearu Economc

15 Economc Polcy n he Wake of he Crss VAR lags = Null yohess λ ess race Table no. 5: Conegraon Tes Alernave yohess Sascs 5% Crcal Value τ = τ >.**. τ τ >.. λ ess max τ = τ =.5**. τ = τ =.. Noe: The lag lengh s deermned by he sequenal AIC es. **denoes he 5% sgnfcan level. We consder he level daa o have no deermnsc rend and he co-negrang equaons o have no nerce whch s clearly saed n Johansen (5). The null hyohess s n he followng form: 5 * ( ) : Πy Bx = ' y where θ, () y denoes he endogenous varable; he conegraon vecor; = ' x denoes he exogenous varable; θ s Π s he co-negraon vecors. We use wo sascs for he es, he Trace-sasc ( ) and he Maxmumegenvalue sasc ( λ ): max = τ k λ ( ) log( ˆ race τ T λ ) λ race =, (7) λ τ, τ ) = T log( ˆ λ ), () max ( τ where λˆ s he esmaed value of he characersc roo; vz. egenvalue, obaned from he esmaed Π marx T, s he number of usable observaons. When he arorae values of τ are clear, hese sascs are smly referred o as λ race and λ max. Wh he 5% sgnfcan level, he resuls of he conegraon es shown n Table no. 5 rovde evdence ha FDI and GDI are conegraed. Based on hs long-run relaonsh, he error correcon erm s secfed as follows: 5 We consder all he fve models wh deermnsc rends roosed by Johansen (5), bu only he model of long-run relaonsh conforms he economc relaonsh and sasc resuls. Secal Number November 7

16 Busness-Cycle Asymmery and Causaly Beween Foregn Drec Invesmen and Fxed Caal Formaon ECT = GDI.5FDI (.) () Equaon () dslays he sable long-run relaonsh beween FDI and GDI, -value n he arenhess show he osve mac of FDI on GDI a % sgnfcan level. Ths resul mles ha % ncrease n FDI booss a rase.5 % of GDI, rovng he comlemen beween FDI and GDI n he long run. Smly u, FDI nflow hels he ncrease n GDI. Ths fndng could be nerreed ha he more FDI ha governmen olces arac, he more GDI ncreases, whch n urn, could fuel economc growh of he counry. Because of he aearance of conegraon, when buldng he vecor error correcon model o es for causaly beween FDI and GDI, we add he error correcon erm n he model for analyzng he adjusmen of shor-run dsequlbrum and furher confrmng he dynamc relaon beween hese wo varables. Besdes, n order o realze he exsence of nonlneary, he lnear es s aled o each mono-regme model o verfy he omal framework adoed. Durng he rocess of lnear es, we follow he esng mode of Tsay () whose null hyohess s he lnear TVECM and alernave hyohess s he nonlnear VECM. Table no. shows he resuls of lnear es reresened by he -values of sasc Ch-squared es. When he hreshold varable delays erods (d=), he esng resul sgnfcanly rejec he lnear hyohess, confrmng he nonlneary of model. In oher words, we could emloy ACDR - o searae he shor-run dynamc relaonsh beween FDI and GDI no wo regmes. d Table no. : Lneary Tes Noe: The above values are he -values of Ch-square es for lneary. In order o accuraely esmae reveal he relaonsh among he varables, we follow he smlcy rncle ha when esmang equaons () and (), we delee he varables whose coeffcens are nsgnfcan. The esmaon resuls of he TVECM model are lsed n equaons () and (). Numbers n he squared brackes are he 7 Amfearu Economc

17 Economc Polcy n he Wake of he Crss summaon of he coeffcens, and ** and *** sand for he 5% and % sgnfcan levels. The hreshold value equals., whch means ha ACDR. - > corresondng o he exansonary regme and observaons belongng o hs erod. When ACDR., ndcaes he recesson regme, and 5 observaons are n hs - erod. I s obvously seen ha, he exansonary regme s longer han recesson regme n Tawan durng he samle erod. To asceran he aroraeness of he model, s necessary o verfy f he esmaed resduals are whe noses. The ARC() es shows ha he varances of he resduals do no exhb frs-order heeroskedascy. LM() es shows ha here s no exs -erod auo-correlaon of he resduals. The cross-correlaon shown n Fgure no. 5 also confrms ha he resduals do no have cross correlaons. ACDR >. - ACDR -. Fgure no. 5: Cross correlaon of GDI and FDI whn regmes and Secal Number November 7

18 Busness-Cycle Asymmery and Causaly Beween Foregn Drec Invesmen and Fxed Caal Formaon The Granger causaly es s emloyed o analyze he shor-run relaonsh beween FDI and GDI and he macs of he exogenous varables on he wo endogenous varables. The sgns of he numbers n he squared brackes of equaons () and () are used o deermne he drecons of he relaonsh and of he macs., GDI, FDI, FDIO, GDP,, *** [.] [-.7] [.] [.5] ACDR 5, GNS, EX ωect,, [.] [.] [-.] GDI =, GDI, FDI, FDIO, GDP,, *** *** *** [.] [.] [.] [-.] ACDR 5, GNS, EX ωect,, *** *** [.] [-.7] [.5] - - >.. ARC() es = 7.-E5 (.) LM() es =. (.7) ARC() es =.5 (.) LM() es = 7. (.) (), GDI, FDI, FDIO, GDP,, *** [.7] [-.] [.] [.5] ACDR >. - 5, GNS, EX ω ECT,, ** *** [-.] [.] [-.] FDI =, GDI, FDI, FDIO, GDP,, *** ** [5.5] [-.] [.5] [7.] ACDR -. 5, GNS, EX ω ECT,, [-.5] [.] [-.] 75 Amfearu Economc

19 Economc Polcy n he Wake of he Crss ARC() es =.5 (.) LM() es = 7. (.) ARC() es =.5 (.) LM() es =. (.) () Table no. 7 exhbs he causal es resuls whn he wo regmes. The frs column of he able lss he deenden varables; he second column lss he causaly; he hrd and he fourh columns ls he null hyoheses, he sums of he coeffcens, he values of he Chsquare sascs, and he values corresondng o he exansonary regme; he ffh and sxh columns show he same enes as hose of he revous wo columns and corresond o he recesson regme. Dee nden vara ble GD Causaly drecon FDI GDI FDIO GDI GDP GDI GNS GDI EX GDI ECT GDI Table no. 7: Causaly Tes Exanson ( ACDR. ) - > Null hyohess and sums of coeffcens =... = :,, = = ˆ, =-.7 :, =, =, = ˆ, =. :, =. =, =.5 ˆ,,, : 5, = 5, = 5, =. ˆ,5,, :, =, =, = ˆ, =. : ω = ˆω -. = Chsquare es.*** (.). (.) 5. (.). (.).7 (.) -.5 (.) Recesson ( ACDR. ) - Null hyohess and sums of coeffcens =... = :,, = = ˆ =., :, =, = = ˆ =., :, =, = ˆ,,, : 5, = 5, = =-. ˆ,5,, =. :,, = = ˆ, = =-.7 : ω = ˆω =.5 Chsquare es 7.55** * (.).77** * (.).** * (.).7** * (.).55 (.7).55** * (.) Secal Number November 7

20 Busness-Cycle Asymmery and Causaly Beween Foregn Drec Invesmen and Fxed Caal Formaon FD GDI FDI FDIO FDI GDP FDI GNS FDI EX FDI :, =... =, = ˆ = =.7, :, =, =, = ˆ = =., :, =. =, ˆ =.5,,, : 5, = 5, = 5, ˆ =-.,5,, :, =, =, ˆ =, =.. (.).7 (.).5 (.). (.) 7.** (.5) :, =... =, ˆ = = 5.5, :, =, = ˆ =, =.5 :, =, = ˆ =7.,,, : 5, = 5, = ˆ =-.5,5,, :, =, = ˆ =, =.7.7 (.7) 7.7** (.5).5 (.5).5 (.).5 (.) ECT FDI : ω = ˆω = -. -.*** (.) : ω = ˆω = (.) Noe: The omal hreshold value (γ ) s.; he lag lengh of TVECM () s ; he omal lag of he hreshold varable (d) s. The noaon A B resens he null hyohess ha he changes of (lagged) A canno exlan (curren) B. The values n he arenheses (.) are he -values of he Ch-square sascs of he jon es. *** and ** denoe he % and 5% sgnfcan levels, resecvely In order o clearly analyze he es resuls n Table no. 7, we searae he analyss no wo ars, one s he drec effec (he srong exogeny), and anoher s he ndrec effec (weak exogeny) n each economc regme. Whn exanson erod ( ACDR. ), he - > drec effec of FDI on GDI s undreconal and negave, ndcang he subsue relaonsh beween hem, n oher words, foregn nvesors exec o gan fuure rofs and ncrease nvesmens n Tawan. owever, hs behavor would crowd ou domesc nvesmens and ousand he keen comeon beween foregn and domesc nvesors. All he four exogenous varables do no have eher drec or ndrec macs on GDI, exce for EX ha s found o have osve effec on FDI. Ths osve effec evdences ha a derecaon of NTD could arac FDI. Addonally, he sgnfcan ECT coeffcen ( ˆω ) reveals he ndrec affecon of exogenous varables on FDI hrough ECT. Smly u, alhough mos exogenous varables could no mac FDI n he shor run, hey could affec FDI hrough he shor-run devaon adjusmen oward he equlbrum durng exanson. 77 Amfearu Economc

21 Economc Polcy n he Wake of he Crss Oosely, whn recesson erod ( ACDR. ), he drec effec of FDI on GDI - s osve, rovng he comlemen relaonsh beween hem. Ths means ha he success n aracng FDI of governmen hrough economc or fnancal olces wll enhance GDI and vce versa. The mac of he four exogenous varables are summarzed as follows: he osve mac of FDIO and GNX on GDI resens a fall of domesc nvesmen along wh a reducons n ouward nvesmens and naonal savng; The negave mac of GDP and EX on GDI exlans ha when GDP goes down, he governmen may ado smulus or encouragng olces o enhance nvesmen movaons, whch n urn, ncreases GDI. Whereas, he derecaons of NTD s found o dscourage GDI, and he arecaons of NTD hels enhance GDI. There s only one exogenous varable, FDIO, has osve effec on FDI, revealng he cu n boh Tawan s ouward and nward nvesmen. The sgnfcan ECT coeffcen ( ˆω ) dscloses he ndrec affec of all he exogenous varables on GDI hrough ECT, n oher words, all he exogenous varables affec GDI hrough he shor run devaon adjusmen oward he equlbrum durng recesson. Based on he emrcal resuls n hs aer, s shown ha mos exogenous varables, n he exanson erod, could no drecly affec FDI bu ndrecly nfluence FDI hrough he shor-run adjusmen oward he equlbrum, however, hey, n he recesson erod, merely nfluence GDI hrough he shor-run adjusmen oward he equlbrum. In oher words, he asymmery of busness cycles n he shor run mgh cause he delay macs of he exogenous varables on FDI or GDI. Ths fndng suggess olcy-makers ha s a crucal o onder on he shor-run adjusmen as well as he long-run uncomlemenary relaonsh beween FDI and GDI before arovng he conraced olces n he booms or he exansve olces n he recesson. Our fndngs roose a comlex relaon among FDI, GDI and macroeconomc varables. Frs, we fnd evdence conssen wh Wald and Pauly s () fndngs of he comlemenary relaon beween FDI and GDI merely n he long-run durng recesson. Second, Feldsen (5) fnd ha an ncrease of FDIO would reduce GDI, whle Wald and Pauly () and Desa e al. () oban a comleely oose resul. In hs aer, we also fnd ha FDIO has a osve mac on GDI, bu hs effec could only be hold n he long-run durng recesson. Thrd, alhough we could no fnd he sgnfcan resul conssen wh Ang () on he osve affec of GDP on FDI, we found he evdence conssen wh hm on he osve affec of EX on FDI. These nconssen resuls mgh be resuled by he samle dfference and he consderaon of busness cycle asymmery, whch we beleve are he rmary facors conrbung o he dfferences of he emrcal fndngs. Abou he curren fnancal crss, he US subrme morgage crss has dramacally dsurbed he world fnancal markes. The losses caused by he subrme morgage crss are ncreasng gradually, mellng he crss o develo no he cred crss among he banks and makng he world fnancal marke urbulen. Ths crss generaes he caal nflow no bond marke, he dramac fall of mos sock markes, and he rad ncrease of neres rae. Esecally, because of he rad ncrease of neres rae, here s a lo of rang agences downgrade several ssuers of commercal aer, causng he dsruon n he asse-backed commercal aer markes, rasng he rsk of borrowers; hence, bank solvency became moran. Therefore, he shor erm need, n no only US bu also Tawan, s how o enhance he solvency of Banks. FED announced n December 7 ha and Euroean Cenral bank, Bank of England, Bank of Canada, Swss Naonal Bank, Secal Number November 7

22 Busness-Cycle Asymmery and Causaly Beween Foregn Drec Invesmen and Fxed Caal Formaon Bank of Jaan, Sweden`s cenral Bank muually ake comrehensve measures o reach her urose. Tawan synchronously ados he lke olces; such as rovdng banks wh he low cos caal wh he emorary Term Aucon Facly and lowered dscoun rae. These olces hel o slow down he ressure on he ncreasng shorage of caal. owever, accordng o our emrcal resul, FDI and GDI are subsue n he shor run durng exanson and comlemenary durng recesson, and he busness-cycle asymmerc has a grea mac on FDI nflows hrough numerous channels durng boom and on GDI durng recesson. Conclusons Ths sudy uses he TVECM o examne he causaly beween FDI and GDI n Tawan. We emloy he ACDR as he hreshold varable whose values are endogenously deermned by he model o avod he shorcomngs of he radonally CDR ha subjecvely (exogenously) selec he hreshold values. The advanage of dong hs s o enhance he esmaon effcency. Unlke revous sudes ha are consraned by he lnear esmaon, hs sudy akes no accoun he ossbly ha he relaonsh beween FDI and GDI could be affeced by he busness cycle asymmery. Under hs consderaon, we have wo major emrcal fndngs. Frs, here s a sable long-run relaonsh beween FDI and GDI, and he wo varables are comlemenary. Second, FDI and GDI are subsue n he shor run durng exanson and comlemenary durng recesson. Moreover, hrough he adjusng rocess oward he equlbrum, all he exogenous varables could ndrecly mac FDI durng exanson and ndrecly affec GDI durng recesson. Ths mles ha he economc nformaon has an grea mac on FDI nflows hrough numerous channels durng boom, and on GDI durng recesson. Ths sudy, comared o he relaed leraures, has he followng nnovaons and conrbuons. Wh regard o he research movaon, hs s he frs aer usng he nonlnear model o exlore he relaonsh beween FDI and GDI n Tawan. As o he mehodology, our model dffers from hose used by revous sudes, such as he lnear VAR and VECM whch jus focus on he symmerc relaon beween varables and overlook he asymmerc effec. For new dscoveres, we fnd ha he saus of he busness cycle, recesson or exanson, has a grea mac on he relaonsh beween FDI and GDI. Usng Tawan s daa o carry ou he emrcal sudy, hs aer rovdes reasonable and logcal exlanaons for fndngs ha are new comared o hose of he revous leraure. On he academc ersecve, we emloy he mehodology and he model ha have never been used before n hs feld and conrbue new dscoveres o he exsng leraure. References Ang, J. B.,. Deermnans of foregn drec nvesmen n Malaysa. Journal of Polcy Modelng, /,. 5-. Bayoum, T. & Lworh, G.,. Jaanese foregn drec nvesmen and regonal rade. Journal of Asan Economcs, /, Beaudry, P. & Koo, G.,. Do recessons ermanenly change ouu? Journal of Moneary Economcs,,.. 7 Amfearu Economc

23 Economc Polcy n he Wake of he Crss Buer, W., Corse, G. & Pesen, P.,. Fnancal Markes and Euroean Moneary Cooeraon. Cambrdge Unversy Press. Chakrabar, A.,. The savng-nvesmen relaonsh revsed: New evdence from mulvarae heerogeneous anel co-negraon analyses. Journal of Comarave Economcs,,. -. Choe, J. I.,. Do foregn drec nvesmen and gross domesc nvesmen romoe economc growh? Revew of Develomen Economcs, 7/,. 57. Cho, J. J. & Jeon, B. N., 7. Fnancal facors n foregn drec nvesmens: A dynamc analyss of nernaonal daa. Research n Inernaonal Busness and Fnance, /,. -. Corbn, A.,. Counry secfc effec n he Feldsen-oroka aradox: A anel daa analyss. Economcs Leers, 7,. 7-. Cleveland, W. S.,. Vsualzng Daa, Summ, NJ: obar Press. Cleveland, W. S.,. The Elemens of Grahng Daa, Summ, NJ: obar Press. Chambers, J. M., Cleveland, W. S., Klener, B. & Tukey, P. A.,. Grahcal Mehods for Daa Analyss Murray ll, NJ: Wadsworh & Brooks/Cole Publshng Comany. Dar, A. & Amrkhalhal, S.,. On he fscal olcy mlcaons of low caal mobly: some furher evdence from cross-counry, Tme Seres Daa. Souhern Economc Journal,,. -. Desa, M. A., Foley, C. F. & nes Jr., J. R.,. A mulnaonal ersecve on caal srucure choce and nernal caal markes. Journal of Fnance, 5/,. 5-. De Va, G. & Abbo, A.,. Are savng and nvesmen co-negraed? An ARDL bounds esng aroach. Economcs Leers, 77,. -. Dewener, K. L., 5. Do exchange rae changes drve foregn drec nvesmen? Journal of Busness, /,. 5. Fan, J. & Gjbels, I.,. Local olynomal modellng and s alcaons. Chaman & all: London. Feldsen, M. S., 5. The effecs of oubound foregn drec nvesmen on he domesc caal sock, n Marn Feldsen, James R. nes Jr., and R. Glennubbard, eds., The effecs of axaon on mulnaonal cororaons. Chcago: Unversy of Chcago Press,. -. Froo, K. A. & Sen, J.,. Exchange raes and foregn drec nvesmen: An merfec caal markes aroach. Quarerly Journal of Economcs,,. 7. ärdle, W.,. Smoohng Technques wh Imlemenaon n S. New York: Srnger Verlag. Jansen, W. J.,. The Feldsen-oroka es of Inernaonal caal mobly: Is feasble? IMF Workng Paer /. Johansen, S., 5. Lkelhood-based nference n conegraed vecor auoregressve models, Oxford: Oxford Unversy Press. Knosha, Y. & Mody, A.,. Prvae and ublc nformaon for foregn nvesmen decsons. CERGE Workng aer, No 5. Kyoa, K. & Uraa, S.,. Exchange rae, exchange rae volaly and foregn drec nvesmen. World Economcs, 7/, Secal Number November 7

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