THE IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH IN UNITED ARAB EMIRATES: EMPIRICAL INVESTIGATION
This paper investigates the causal relationship between RGDP, foreign direct investment (FDI), and domestic savings DS in UAE for the period 1980-2012. The econometric methodology employed was the Cointegration and Granger Causality test. First, the stationarity properties of the data and the order of integration of the data were tested using both the Augmented Dickey-Fuller (ADF) test. We found that the variables were non-stationary in levels, but stationary in first differences; that is, they are integrated of order one I (1)). Since we used single equation model(s), the application of Johansen multivariate approach to cointegration was necessary to test for the long-run relationship among the variables. The result showed existence of cointegration among the variables tested., Robust empirical findings drawn from the Johansen cointegration analysis suggest the existence of a long-run equilibrium relationship. Furthermore, Granger- causality test indicates that there is bi-directional causal links on the RGDP – RGDS relationship. However, there is a one-way causality running from FDI to GDP, as results for the two year lags imply, strongly indicating that FDI Granger-causes economic growth in UAE. The results reveal another unidirectional causation running from FDI to RGDP in UAE.Therefore, from the results of the present study, there is RGDS and FDI driven economic growth in UAE that is important for the development policy of the country. Government should pay more attention to make the environment better for foreign investors as well as to encourage increasing of domestic savings.
|Keywords: Cointegration, Granger Causality, Foreign Direct Investment, Economy of UAE.|
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