The issue of the attractiveness of foreign investments into the economy of Russia has existed now for many decades and continues to have scientific and practical importance.
Nowadays the question of an estimation of influence of foreign direct investments (henceforth, FDI) on the development of Russian economic system has a special urgency as during the past few years the FDI flow has been constantly growing.
The persistently high growth rates in FDI in the last few years do raise the prospect that Russia will feature prominently as a destination for foreign investment in the world economy.
The purpose of my research is to investigate the impacts of the inflow of FDI on economic growth of Russia, and also identify particular sectors of Russian economy in which the FDI has a great effect. The reasons behind the research are given in section 3 of this paper.
The next section of the paper covers a review of literature, which identifies a theme. The third section presents research objectives, while the fourth section contains the research methodology and data collection, and the final section presents expected results and remarks.
Literature review
Early studies on FDI, such as Singer (1950) and Prebisch (1968) claimed that the target countries of FDI receive very few benefits, because most benefits are transferred to the multinational company's country. One view about the negative effect of FDI on the host country's economic growth is that although FDI raises the level of investment and perhaps the productivity of investments, as well as consumption in the host country, it lowers the rate of growth due to factor price distortions or misallocations of resources. Bos, Sanders and Secchi (1974) identified another factor that caused the negative effects of FDI on growth, the price distortions due to protectionism and monopolisation and, finally, natural resources depletion.
Borensztein, De Gregorio and Lee (1998), looked at the relationship of FDI and economic growth in developing countries. They found that FDI allowed for transferring technology and for higher growth when the host country had a minimum threshold stock of human capital. Their results showed also that the main way that FDI increases economic growth is by increasing technological progress, instead of increasing total capital accumulation in the host country. They used the gross FDI which refers only to inflows, reported in the "International Financial Statistics", and for economic growth they used the growth rate of income as the average annual rate of per capita real GDP over each decade. Their results indicated that for host countries with very low levels of human capital the direct effect of FDI on growth is negative, otherwise it is positive.
Nair-Reichert and Weinhold (2001) observed the relationship between FDI and growth in developing countries by appling mixed fixed and random estimation and find that there is a causal link between FDI and growth.
Other researchers, Campos and Kinoshita (2002), examined the effects of FDI on growth for the period 1990-1998, for 25 Central and Eastern European and former Soviet Union transition economies. In these countries FDI was pure technology transfer. Their main results indicated that FDI had a significant positive effect on the economic growth of each selected country. These results were consistent with the theory that equates FDI with technology transfers that benefit the host country. Similar results were found by Madura and Picou (1990), La Follette (1990) and Hooley et al. (1996).
Overall, the theoretical literature on FDI suggests that inflows of FDI have positive effects on the economy of the host country (such as technology transfers, productivity gains, the introduction of new processes, managerial skills and know-how, and employee training) and in general it is a significant factor in modernizing the country's economy and promoting its growth. However, the empirical evidence on FDI and economic growth is ambiguous, so it is impossible to make any judgment without a thorough study.
The impact of FDI on economic growth in Russia is not well studied so far. Some of the papers (for example, J. Konings, 1999, H. Sun, 1996) use the data on formerly socially-planned transition economies, but it seems plausible that the nowadays situation in Russia may be quite different, since some Russia-specific political, geographical and social features might be important and need to be taken into account.
Research objectives
This project proposes to test the hypothesis that FDI contributes to the economic growth of Russia. There are some reasons behind this objective.
First of all, some of the empirical studies indicate that high foreign capital inflows and high percentage share of the FDI stock in the GDP play a vital role in the Russian economy and enhances sustained economic growth (Brock, 2005).
Secondly, it is assumed that FDI boosts productivity, encourages employment, and stimulates innovation and technology transfer.
Finally, FDI hypothetically become an important indicator of the advancing globalization process in the world (Guillermo de la Dehesa, 2006).
The completed project, subsequently, may have the practical and scientific use for further research on this area or for the government (e.g. in policy making) by providing new evidence on FDI-Growth relationship in Russia.
Research Methodology and Data Collection
In order to get answers to the objectives, which are to estimate the impact of FDI on economic growth in Russia, it is planned to look at different variables. Especially on those, from which benefits would come: growth, employment, the balance of payment (BP), and exchange rates.
Methodology which will be used in order to achieve research objectives will be mainly based on econometric methods. For this purpose we will use the simple ordinary least square (OLS) regressions and the Barro-Sala-I-Martin empirical framework for the neoclassical Solow-Swan model. Here professional econometric softwares such as Stata or EViews are planned to be employed.
These types of analysis not only provide general information on the relationship of FDI and economic growth of the country, but also make it possible to calculate the distance of an individual country's variables from the average regression line. From this, a whole range of conclusions for a particular country (Russia) can be derived.
For the analysis, panel data will be used. All data will be obtained from the relevant sources, such as:
World Bank
World Bank`s World Development Indicators
International Monetary Fund
IMF`s international Financial Statistics
United Nations Conference on Trade and Development (UNCTAD)
Central Bank of Russia
Various issues of the Bank of Russian`s Quarterly Bulletin
Other governmental statistics or other public surveys
Other financial datasets
Relevant economic journals.
Some data will be converted into natural logarithms for the usual statistical reasons.
Empirical panel data studies on growth are generally carried out for periods of around 30 years, with five-year average observations (Barro and Lee, 1994; Caselli, Esquivel and Lefort, 1996). Because of the relatively short transition period of the Russian economy (15 years) and because capital inflows into Russia have been registered by the state statistical authorities only since 1995, and as the data for all the other variables altogether are available only since 1996, our time period is limited to 14 years (1996-2009).
Conclusion (Expected results and remarks)
At this stage the expected results for the research are to provide empirically tested evidence on the effect of FDI on economic growth in Russia over the 1996-2009 periods, therefore to examine the link between inward FDI stock and economic growth and found whether the foreign direct investment has a significant impact on Russian economic growth.
