The Impact of FDI on Economic Growth in The UK

Research Aim and Objectives

The target that this study is trying to achieve is to analyze the influence of FDI on the state of economic growth in the UK. The researcher was encouraged to identify how the FDI leads to the monetary development in the country and how that achieves the status of a stabilized global economy. From the realization of these aims, the researcher designed a few objectives which are as follows:

Objective 1:  To understand the concept of FDI in the context of economic development.

Objective 2: To recognize the consumer price index and exchange rate of the UK as the factors affecting the development of the economy.

Objective 3: To identify the impact of FDI on the economic growth of the country.

Objective 4: To develop recommendations for increasing the flow of FDI for effective economic growth. 

Research Question

The research question that this study is based on is the following: 

Question: What impact does the FDI has on economic growth and its associated variables in the UK?  

Research Problem

The FDI is an essential variable to determine the growth in an economy (why?). There is a need to assess the impact that Brexit has on the economy of the UK and how it will impact their economic development. As per the study of Dhingra et al. (2016), there is not any existing research found on the relation of the two variables after the decision taken by Great Britain to leave the European Union. To fill the research gap, this study is carried out to study the impact of FDI on economic growth. The report discusses two variables that are FDI and economic growth. To resolve the research problem and achieve the objectives of this study and in support of previous variables, GNP (Gross National Product) and GDS were discussed also.        

LITERATURE REVIEW

Introduction

Global events like the US-China trade war and Brexit had brought a certain level of global trade instability. This instability in the global trading environment had also increased the prices of products and raw materials. Bringing stability to the trade practices of the countries had become a challenge to the economists and government officials of many countries. Brexit has a more severe impact on the trading and economic practices of the United Kingdom (UK) (Simionescu, 2018). In the next section, an empirical review of literature will be developed that will be discussing the economic progress of a country in respect of FDIs made in the country. After the development of the empirical review, the hypothesis of the research will be developed.

Empirical literature review

Doytch and Narayan (2016) explained FDIs (FDI) as the process that is used by the investors of one country to start or support businesses in other countries with long-term benefits. Investors can make horizontal and vertical FDIs when they are making investments in other countries. Their study uses the sources of 74 countries with the research period ranging from 1985 to 2012. The results of the research found that the use of FDIs can deliver a high significance to the economy of the countries. Nistor (2015) established a model for measuring the FDI inflow in the BRICS countries. The BRICS countries include nations from Africa, Europe, and Asia, like South Africa, Russia, and China. It was explained by Nistor (2015) that the FDI and the economic growth in the selected countries were determined through the factors of consumer price index and foreign exchange rate in the countries.

It has been identified that FDI often has a positive impact on the economic growth of certain countries (ref). Further, Pegkas (2015) conducted a study on determining the effect of FDI on the EG of the Eurozone countries. Modified and dynamic OLS tests were implied in the collected data for the period 2002 – 2012. It was determined in the research that FDI is the main factor that affects the EG of the Eurozone countries. On the other hand, it was argued by Jugurnath, Chuckun, and Fauzel (2016) that the increased implication of FDI in the economy of the country can damage the domestic or local firms of the country. This is because, when the FDI is conducted by the investors, different financial instruments that were owned by the country previously are shared with them. This is beneficial until the investors are making investments in that specific financial sector of the country’s economy. These results were determined after measuring the 32 Sub-Saharan countries in Africa from 2008 to 2014. The implied tests were OLS.

Kucharčíková et al. (2015) also explain that FDI and the country’s financial growth have a constructive or positive relationship. Kucharčíková et al. (2015) tested the impact of FDI on the gross domestic product (GDP) of the countries. This use of GDP was because it is the measure of the EG in all of the countries. Kucharčíková et al. (2015) used North-Western Slovakian countries to run panel data analysis and modified ordinary least square regression for testing such a relationship. The acquired results from the above research did not reduce most of the ambiguity regarding the impact of FDI on the EG of the countries. This is because there is a major economic difference between the practices of the developed and developing economies of the countries (Kucharčíková et al. 2015). The research conducted by Abdouli and Hammami (2017) was based on 17 Middle Eastern and North African countries for some time 1990-2012. Using fixed and random effects of OLS, the research identified that previously developed economic policies for economic growth are negatively impacted by FDI (Abdouli, and Hammami, 2017).

Iamsiraroj and Ulubaşoğlu (2015) also experienced that, in the UK, the use of FDI can help the economy in generating some positive spill-over so the economy can easily experience effective growth. However, the GDP of the UK plays an integral role in determining whether effective growth occurs or not. The study was conducted from 2000 to 2012. The measurement of GDP for determining economic growth was done by designing an equation, in which the variable ‘t’ determines the number of times the variables of the research were been used in determining the exact results of the research (Iamsiraroj and Ulubaşoğlu, 2015). It was determined by Roudi, Arasli, and Akadiri (2019) that the effect of FDI on GDP growth was positive and it was discussed that the FDI and the EG positively impacted the financial outcomes in the case of developed countries like the United Kingdom (UK). This study was conducted for the UK GDP data based on 1995-2014 data. Further, Santangelo (2018) also conducted a study to determine the FDI impacts on the EG for the 10 developed countries and found that there are certainly long and short-term benefits in the EG when FDI activities are performed. The study was conducted from 1998 to 2018. These long-term and short-term benefits of FDI are an increase in the employment numbers of the country; generating profits for the economy with long-term incentives; and, bringing many opportunities for the host country to include more investments from many other countries (Zhu et al., 2016).

To explain the positive impact of the FDI on the EG of the UK, Hussein and Ahmed (2019) analyzed Oman. Oman is a first-world country with an economy that is based on the main resource of oil. The revenues that are generated from extracting and selling oil to other countries had a direct relation to the growth in GDP. This growth in GDP of the country brings many investors from local and abroad to make investments in the country. With the FDI at a progressively high level, the political situation of the country also gets stable (Salahuddin, Gow, and Ozturk, 2015). This political stability in the region becomes the reason for an increased level of economic growth and development in Oman. There are many other factors like employment, imports, and exports that have an impact the economic growth (Alraja, Hammami, and Al Samman, 2016).

Saidi, Mbarek, and Amamri (2018) conducted research for determining the correlation between the FDI practices and EG of the 10 Asian countries. These 10 Asian countries were analyzed for checking the impact of FDI, employment, exports, and imports on their economic growth. The results of the research indicate that there was a positive connection between the discussed factors of employment, import and export, and FDI on the economic well-being of a few countries in Asia (Kirti and Prasad, 2016). In the research conducted by Omri et al. (2015) for identifying the impact of the FDI on the EG of five developed countries, it was mentioned that the FDIs have a positive and optimistic influence on the economy of the country. It was further established by Omri et al. (2015) that the increased FDI in the country of the UK can help increase economic growth practices. This is because the UK is experiencing Brexit that had negatively impacted the economic growth of the country.

Chapter Summary

The FDI has been described as a process that is used by the investors of one country to assist businesses in a foreign land. The investment can be either horizontal or vertical. It is said that FDI is the main variable that stimulates economic growth in a country. Investment from abroad brings a change in the operations of the developing country as technological advancements take place in the country and financial resources are provided for the business operations. Investors’ withdrawal from a country can have severe impacts on the economy as unemployment will rise and the GDP of a country will take a significant hit and will reduce.

A positive relationship can be observed between the two variables that are FDI and economic development. Growth in the economy is associated with the GDP level of the country and the relationship is also dependent on the status of progress of the country. A developed country with an established infrastructure can make better use of the FDI than a developing country. In the UK, the FDI can help create a positive spillover effect which helps the economy experience growth. The investment made into a foreign country has both short-term and long-term impacts. These impacts are related to the increase in employment level in the country, long-term profit-making plans, and many other opportunities to use the investment in such a way that it attracts additional investment from other countries or investors. As more research was carried out it was evident that there was a positive relationship between FDI and the financial growth variables. Similarly, in the case of the UK, political instability in the country will lead to negative outcomes in terms of development, even if FDI causes economic expansion.

METHODOLOGY

The research discusses the UK economy in detail and the role of FDI in causing economic growth. The variables that were also impacting the economic growth were the country’s Gross domestic product (GDP), gross domestic savings (GDS), consumer price index (CPI), and exchange rate. These mentioned variables describe the ability of the economy for making successful growth. To determine the actual effect of the FDI on economic growth, the current research divides FDI into two parts of FDI inflows and FDI outflows. The data used in the research was from 1971 to 2017. World Bank records were used as the source of data. The data was of a time series nature and is based in the UK. Several tools were used to analyze the data that included descriptive statistics, correlation and regression analysis, and graphical analysis to understand the role of the variables during the specified period. 

The variables to be mentioned in the research included the following 

GDP growth rate: it estimates the rate of growth in the production level of the economy.

GNI growth rate: it quantifies the rate at which the value of citizen-made products plays a role in increasing the economy 

Gross National Savings Growth Rate: the rate at which the national savings are increasing in the country is measured in it. 

FDI Inflow: investment by foreign nationals 

FDI outflow: investment by locals in foreign companies.

Consumer price index (CPI): weighted average prices paid by the individuals of the country for supporting the economic functions.

Foreign exchange rate: currency rate paid by one country to purchase the single unit of currency of other countries. 

The GDP growth level, the gross national income level, and the GDSs have been volatile over the past years with the GDP growth level reaching negative during the early 2010s as there was a financial crisis all over the world. The housing prices were severely affected as they reached one of their lowest points in many years. In 2016 as political instability rose because Britain decided to exit from the European Union, the GDP growth and the GNI of the country were severely impacted. Reports suggest that Brexit caused the level of trade to also decline. There is no specific trend that could be detected as the performance of the UK has been very inconsistent and volatile. 

A descriptive statistics tool will be used to describe the data quantitatively and summarizes it as per the features of the information (Silverman, 2018). It will help in sampling out the data which is distributed over 47 years and variables like GDP growth, GNI, and economic growth needs to be assessed by the descriptive statistic tool. This will help understand the trend and reach a conclusion about the behavior of the data (Ivezic et al., 2019). 

The correlation was studied to analyze the relationship between the dependent and independent variable which in this research is the FDI and economic growth. The significance level was determined to analyze the relationship between the two given variables (McCormick and Salcedo, 2017). The level of correlation is determined by its magnitude which ranges from -1 to +1. 0 means no correlation, +1 means perfectly correlated, and -1 meaning negatively correlated (Hox, Moerbeek, and Van de Schoot, 2017). The hypothesis was formed to test whether the two variable is correlated. The hypothesis that was made is as follows: 

Ho: there is no relation between FDI, CPI, exchange rate, and economic growth

H1: there is a relation between FDI, CPI, exchange rate, and economic growth

Following this research methodology, the research objectives will be achieved.