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Modeling FDI Flows from the USA to Canada:Two Main International Financial Variables Affect the Long-Run Economic Growth

Author

Listed:
  • Ghada Gomaa A. Mohamed
  • Morrison Handley-Schachler

Abstract

This paper develops a model to predict for the spillover effects of the foreign capital inflows on the long run growth under conditions of international economic exposure to foreign exchange rate fluctuations. The paper utilizes a simple open economy version of the Solow growth model with the main features of real business cycle models. In addition, the paper uses a time series model with substitution techniques to test the impact of the spillover effect of foreign capital inflows from the USA on long run growth in Canada, while controlling for exposure to foreign exchange rate fluctuations, as well as for both external and internal balances. The results support the existence of positive spillover effects from foreign direct investment on the economy. The results also show that foreign exchange rate fluctuations have weaken the impact of underlying changes in productivity on the attractiveness of the economy to overseas investors and hence moderate the overall impact of the technology spillover effect of Foreign Direct Investment (FDI) on long-run growth.

Suggested Citation

  • Ghada Gomaa A. Mohamed & Morrison Handley-Schachler, 2015. "Modeling FDI Flows from the USA to Canada:Two Main International Financial Variables Affect the Long-Run Economic Growth," Applied Economics and Finance, Redfame publishing, vol. 2(4), pages 85-94, November.
    • Handle: RePEc:rfa:aefjnl:v:2:y:2015:i:4:p:85-94
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    More about this item

    Keywords

    Foreign Direct Investment; Exchange Rates; The Spillover Effect; International Exposure to Risk; Risk Analysis; Economic Growth; Time Series Analysis; Time Series Substitution Techniques; International Financial Management;
    All these keywords.

    JEL classification:

    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • C - Mathematical and Quantitative Methods
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E - Macroeconomics and Monetary Economics
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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