Review of Economics and Development Studies Vol. 3, No 2, December 2017 111 Volume and Issues Obtainable at Center for Sustainability Research and Consultancy Review of Economics and Development Studies ISSN: 2519-9692 (E): 2519-9706 Volume 3: Issue 2 December 2017 Journal homepage: www.publishing.globalcsrc.org/reads Foreign Direct Investment, External Debt and Economic Growth: Evidence from Some Selected Developing Countries 1 Imran Sharif Chaudhry, 2 Shumaila Iffat, 3 Fatima Farooq 1 Director/ Professor, School of Economics, Bahauddin Zakariya University, Multan, Pakistan, imran@bzu.edu.pk 2 MPhil Scholar, School of Economics, Bahauddin Zakariya University, Multan, Pakistan, 3 Assistant Professor, School of Economics, Bahauddin Zakariya University, Multan, Pakistan, fatimafarooq@bzu.edu.pk ARTICLE DETAILS ABSTRACT History Revised format: Nov 2017 Available Online: Dec 2017 Purpose: The aim of this paper is to analyze the relationship between foreign direct investment, external debt and economic growth. The study is based on a sample of 25 region wise selected developing countries. Panel unit root tests suggest that selected variables are stationary at the level of first difference. Using data from 1990 to 2014, results of FMOLS method suggest that the core variables, foreign direct investment and External Debt have significant positive relationship with economic growth. Labor, Gross Domestic Saving and Government expenditures have positive while Gross capital formation exerts negative impacts on economic growth. Moreover, FDI exerts outstanding effects on growth because one unit rise in FDI raise the growth by 4.03 units while one unit rise in external debt upgrade the growth up to 2.13 units. It means that boundaries of selected developing nations are absorbent to FDI than external debt. The results of “Johansen Fisher Panel Co-integration test” reveal that, there exists a long period relationship among all the explained and explanatory variables. In order to investigate the causal relation among selected variables, pair wise granger causality test is employed. © 2017 The authors, under a Creative Commons Attribution- NonCommercial 4.0 Keywords Foreign Direct Investment, External Debt, Economic Growth, Co-integration, Causality JEL Codes: C33, F21, F34, O47 Corresponding author’s email address: imran@bzu.edu.pk Recommended citation: Chaudhry, I. S., Iffat, S. & Farooq, F., (2017). Foreign Direct Investment, External Debt and Economic Growth: Evidence from some Selected Developing Countries. Review of Economics and Development Studies, 3(2) 111-124. DOI: https://doi.org/10.26710/reads.v3i2.170 1. Introduction Developing nations are not fully financed from internal resources but external funding is also mandatory to minimize the divergence between saving and investment. All the developing economies in the globe are continually motivated for high economic growth. Thus, such nations fascinating the external inflows specifically in the form of foreign direct investment and external debt, which are supposed to be principal sources of external financing. Foreign Direct Investment is considered as a source of Non-cash and cash inflows into the boundaries of recipient nations from abroad. World Investment Report (2011) declared that most of developing nations around the globe have practiced extensive growth in worldwide transactions because of FDI. Moreover, the net contribution of FDI in global GDP has grown-up more than five-times compared to the era of http://www.publishing.globalcsrc.org/reads mailto:imran@bzu.edu.pk mailto:fatimafarooq@bzu.edu.pk mailto:imran@bzu.edu.pk https://doi.org/10.26710/reads.v3i2.170 Review of Economics and Development Studies Vol. 3, No 2, December 2017 112 nineties and beginning of 20th century. Lyroudi et al. (2004) explained that FDI can be transmitted by MNCs in the host nations. External debt is one of among the external sources of finances that have strong effects on the growth of developing nations. External debt is component of total amount of debt in the nation that is payable to recipient economy. It is believed that external debt is beneficial to the recipient nations only if utilized cautiously in the investment & development projects. Investment projects with the help of external borrowing are favorable only when returns exceed the cost. Developing nations are constantly facing the trouble in term of limited financing facilities but external debt from industrialized economies, worldwide organizations like IMF and World Bank provides rays of hope to the capital deficient nations. Past studies shed light on the impacts of external debt on growth of developing economies and categorized into two heads. First group of studies is related to traditional school of thought who considers that borrowing from external resources is positively associated with the economic growth of less developed nations. Moreover, slow growth of underdeveloped economies is backed by low level of domestic savings and foreign exchange earnings. Both the low savings and foreign exchange revenues lead to the twin deficits (fiscal and Trade deficits). General purpose of this work is to conduct the foreign direct investment, external debt & economic growth analysis with specific reference of some (region-wise) selected developing countries. To attain this broad objective, the work has a few specific objectives, which are given below:  To make available the conclusive evidence on the association of FDI &economic growth specifically in context of developing countries.  To analyze the interconnection of externa1 debt &economic growth regarding developing nations.  To empirically scrutinize the effects of Labor, capital, general government final consumption expenditures, and gross domestic saving on economic progress of selected developing nations. 2. Review of Past Literature Ndambendia and Njoupouognigni (2010) described the affectivity of FDI and foreign aid on output growth in the case of thirty-six African nations. The period of study was from 1980 to 2007. This research work inspected the longer period association between FDI, External aid & output growth. Potent evidence has found about positive effects of foreign aid and FDI on output growth. Moreover, Pradhan (2009), Asghar et al. (2011), Agrawal and Khan (2011), Khachoo and Khan (2012), Zakari et al. (2012), Zeb et al. (2013), Jun (2015), Agrawal (2015), Zekarias (2016) provided the potent evidence about positive impacts of FDI on growth of developing nations. Brecher and Alejandro (1977) elucidated that FDI adversely influenced to growth of recipient economies if MNCs transfer their surplus revenues to their parent nationn [Ahmad and Hamdani (2003), Eller, Haiss and Steiner (2005), Falki (2009), Hossain and Hossain (2012), Bashir et al. (2014)]. Chenery and Strout (1966) concluded that External borrowings plays a very crucial role to bridge the gap between saving and Investments. Frimpong and Abayie (2006) appraised the impact of externa1 debt on growth with specific reference to Ghana. Empirical outcomes suggested that co-efficient sign of external debt was considerable positive during the period of study (1970-1999). Furthermore, Sulaiman and Azeez (2012), Rahman et al.(2012), Kasedi and Said (2013) favored the positive impacts of external debt on the growth of developing nations. Bruton (1969) gave contradictory arguments about two Gap theories. Aid was a source of divergence rather than convergence between saving and investment. Furthermore, External aid contracts the growth than to expand. Chowdhury (2001) ascribed the Debt-Growth nexus with specific reference to highly indebted poor and non-highly indebted poor nations. Panel results interpreted a considerable negative causal effect that run from debt to economic growth in the case of both categorized economies. Moreover, Review of Economics and Development Studies Vol. 3, No 2, December 2017 113 Clements et al. (2003), Presbitero (2008), Choong et al. (2010), Farhana & Chowdhury (2014) , Soydan and Bedir (2015), Bonga, Chirowa and Nyamapfeni (2015), Sheikh et al. (2015) disclosed that debt overhang curb the growth in the case of less developed nations. However, this study enlightens few of the following findings, which were not conducted in the past studies.  The study demonstrates a comparison between the effects of FDI and external debt on the economic growth based on selected developing countries during the time span of 1990-2014.  The pros and cons of FDI and external debt on economic growth, which provides sound platform to outweigh the parameters.  Selecting countries continent wise to find out the basics of economic growth which benefits to have a clear picture of developing economies.  3. Theoretical and Conceptual Framework Since the work is essentially associated with the economic growth, models and theories of economic growth collectively construct the theoretical skeleton. FDI inflows and external debt are included into the following theories to enlighten their anticipated impacts on economic growth. Such theories are included, which shows the positive and negative impacts of FDI and external debt on growth of developing nation. A. FDI and economic growth Modernization theory postulated that FDI contributes positively to the growth of less developed countries. The theory posits that economic growth is enhanced by process of capital formation in most of developing economies. Harrod-Domar Growth Model ascribed the mechanism of the economy by which higher level of investment leads to the higher level of economic growth. For a nation to expand and develop, it requires turning away fraction of its possessions from recent consumption and invested them in process of capital formation. Saving is the resources distraction from the current consumption. Saving is not just determinants of the GDP and H-D model argues that every nation must save a certain proportion of GDP that can replace cost of capital. Dependency Theory shows the adverse effects of FDI on growth of the host nation. 1 Conceptual illustration: Figure 1 Figure 1 displays the influence of FDI on economic growth. The right half of fig1 illustrate the positive effects of FDI on growth through technology transfer, employment opportunities, provision of efficient management and infrastructure development while left half elucidated that the repatriation of profits, crowding out effect on domestic investment, capital flight, foreign ownership. Review of Economics and Development Studies Vol. 3, No 2, December 2017 114 B. External debt and economic growth Chenery & Strout (1966) in Dual-Gap theory stated that overseas aid plays a vital role in bridging the Saving-Investment or Import-Export gap. Financing Gap Theory supports the positive impacts of external debt on growth of less developed nations usually; the concept of “financing gap” has tainted the less developed nations, which notably encouraged so-called external source of borrowings. Gap between available funds from domestic resources and total funds requirement refers as financing gap; and external financing is most prominent way to minimize that gap. Debt overhangs theory states that, when economies have high external debt/GDP ratio has comparatively meager finances to make the productive investment, which resultantly deters the growth. The Crowding out Effects Theory ascribed that, charging the high interest rate on debt from debtor country and TOT (terms of trade) of that nation will be deteriorates the growth. Furthermore, recipient nation do not get facility to get external borrowings anymore. The right half of figure 2 depicts the positive impacts of external debt on growth of nation through productive projects; improved technology & expertise, favorable BOP, raising the Efficiency in allocation of resources productivity, debt overhang, crowding out effect, uncertainty, high inflation rate. 2 Conceptual illustrations: Figure 2 4. Description of Data and Methodology A. Sample, Description of Data and Model Specification To combine the time span (t) from 1990 to 2014 with the cross sections (i) that are 25 (region wise classified) developing countries makes the analysis of panel data in order to investigate the association among FDI, Externa1 debt and Economic growth. Economic growth (proxies by GDP at constant 2005 US$) is the dependent variable of this study. Independent variables are Externa1 debt and FDI. Foreign direct investment is proxies by FDI, net inflows (BOP Current US$) and External debt is proxies by External debt stocks, total (DOD, current US$). Other independent variables of this study are labor, capital, gross domestic saving and general government final consumption expenditures. Labor is proxies by labor force, total (current S$), capital is proxies by gross capital formation (current US$), Gross domestic saving (current US$) and Government final consumption expenditures (Current US$). Data for all the variables is taken in millions US$. Table: 1 Data Description Variables Proxy used Unit of measurement Source of data Economic growth RGDP US Dollars WDI Labor LF US Dollars WDI Review of Economics and Development Studies Vol. 3, No 2, December 2017 115 Theoretical model based on Neo Classical Production function is presented as 𝑹𝑮𝑫𝑷 = 𝒇(𝑳𝑭,𝑮𝑪𝑨𝑭) (1) Here, RGDP is the real gross domestic product serve as a proxy for economic growth; LF denotes the labor force, total. GCAF is the gross capital formation (proxy for capital). 𝑹𝑮𝑫𝑷 = 𝒇(𝑳𝑭,𝑮𝑪𝑨𝑭,𝑭𝑫𝑰,𝑬𝑫𝑻) (2) RGDP is not only effected by above-mentioned (Labor, capital, FDI and external debt) four variables. There are many factors that influence the RGDP, but this study includes following two variables (Gross domestic saving and Government final consumption expenditures) in function (2.2) as follows 𝐑𝐆𝐃𝐏𝐢𝐭 = 𝐟(𝐋𝐅𝐢𝐭,𝐆𝐂𝐀𝐅𝐢𝐭,𝐅𝐃𝐈𝐢𝐭, 𝐄𝐃𝐓𝐢𝐭,𝐆𝐃𝐒𝐀𝐢𝐭,𝐆𝐅𝐂𝐄𝐢𝐭) (3) Since analysis is based on panel data, so “t” and “i” subscripts are used with each variable. In equation form it can be written as; 𝑹𝑮𝑫𝑷𝐢𝐭 = 𝜷𝟏𝒊 + 𝜷𝟐𝒊𝑳𝑭𝐢𝐭 + 𝜷𝟑𝒊𝑮𝑪𝑨𝑭𝐢𝐭 + 𝜷𝟒𝒊𝑭𝑫𝑰𝐢𝐭 + 𝜷𝟓𝒊𝑬𝑫𝑻𝐢𝐭 + 𝜷𝟔𝒊𝑮𝑫𝑺𝑨𝐢𝐭 + 𝜷𝟕𝒊𝑮𝑭𝑪𝑬𝐢𝐭 + µ𝒊𝒕 (4) Above Equation word of i (i =1, 2 .., N) Shows the cr0ss sections while t (t=1, 2… T) represented instant and u denotes the error term. B. Panel Unit Root Test – Levin, Lin & Chu test LL&C (2002) recommended panel unit root test for checking stationarity of selected variables. H0 (Null hypothesis) of the test means the existence of a non-stationarity in available data while the H1 (alternative hypothesis) means the existence of stationarity in the data. H0: non-stationary data H1: Stationary data C. Panel co-integration Johansen Fisher Panel Co integration Test After checking the data stationarity, the next task is to judge the long run relationship among variab1es. If all variab1es have similar integrating order & long run correlation prevails among the variables, an evaluation of that sort of relationship will provide errors in stationary form. Variables are co integrated only if long run equilibrium link prevails among them. FMOLS Method Co-integration test give authorization about presence or absence of long run relationship among selected variable. If whole variables have first integrating order, and long run relationship exists, then the next phase is to estimate the specified model by employing the FMOLS method, devised by Pedroni in 1996 &2000. D. Granger causality test Causality is a very essential concern in Econometrics, which refers to the ability of one variable to cause another variable. Granger (1969) devised a comparatively trouble-free test that posits the causality as: consider two variables x and y, a variable is supposed to Granger cause x only if the x is predicted by the lagged values of the y, and remaining all terms suppose to be same and vice versa. Pair wise Granger Causa1ity Tests Pair wise Granger causality test shows causal link between selected variables just as pair wise. It can best be illustrated in the form of following equations Capital GCAF US Dollars WDI Foreign direct investment FDI US Dollars WDI External debt EDT US Dollars WDI Gross domestic saving GDSA US Dollars WDI Govt. final consumption expenditures GFCE US Dollars WDI Review of Economics and Development Studies Vol. 3, No 2, December 2017 116 5. Data Analysis and findings A. Descriptive Analysis B. Table: 2 Descriptive analyses RGDP LF GCAF FDI EDT GDSA GFCE Mean 249,625.80 68.63 97,027.50 8,004.49 64,432.49 97,459.88 40,775.54 Median 56,951.65 15.77 11,141.13 752.18 22,503.09 5,165,037 6,400.70 Maximum 5,270,061 806.50 4,782,094 290,928.40 959,509.80 5,165,037 1,408,395 Minimum 1305 0.67 0.00 -4,550.036 629.44 -2,275.14 90.39 Std.Dev. 562,964.40 159.43 396,128.3 28,733.20 110,062.60 422,073.7 123,656.8 Skewness 5.02 3.89 8.68 7.15 3.58 8.77 6.89 Kurtosis 35.34 13.67 87.68 61.47 20.51 88.56 61.33 Above Table depicts the descriptive statistics results. Results show that average of real GDP is 249,625.80 with standard deviation 562,964.40 and maximum at 5,270,061 while minimum at 1305 during the time span 1990 to 2014 with reference to some selected under developed nations. Average of Labor is 68.63 while its degree of dispersion is 159.43 and its maximum value is 806.50 while minimum is 0.67 during the period of study. Gross capital formation, is 97,027.50 at average, with standard deviation of 396,128.3 and maximum at 4,782,094 while minimum at 0.00. Foreign direct investment has average value of 8,004.49 with standard deviation 28,733.20and maximum at 290,928.40 while minimum at -4,550.036. External Debt is 64,432.49 at average with standard deviation of 110,062.60 and maximum at 959,509.80 while minimum at 629.44. Here the variation in External debt is more than foreign direct investment. Gross domestic saving has an average value of 97,459.88 with degree of dispersion 422,073.7 and maximum at 5,165,037 while minimum at -2,275.14. The average value of Government final consumption expenditures is 40,775.54 with standard deviation of 123,656.8 and maximum at 1,408,395 while minimum at 90.39.Departure from symmetry is said to be skewness. As per descriptive statistics, all the variables are positively skewed. The Kurtosis refers to degree of peakedness or flatness of distribution. For the normal distribution, value of kurtosis is three. Available results give testimony about leptokurtic nature of distribution because value is greater than 3 as per findings. C. Analysis of Correlation Matrix To check the strength of relationship between the variables, correlation matrix is used in this study. Following table interpreted that how much the variables are highly correlated with each other. Table: 3 Correlation Matrix Correlation (probability) RGDP LF GCAF FDI EDT GDSA GFCE RGDP 1.00 LF 0.79 (0.00) 1.00 GCAF 0.92 (0.00) 0.66 (0.00) 1.00 FDI 0.93 (0.00) 0.67 (0.00) 0.96 (0.00) 1.00 EDT 0.90 (0.00) 0.60 (0.00) 0.79 (0.00) 0.82 (0.00) 1.00 Review of Economics and Development Studies Vol. 3, No 2, December 2017 117 GDSA 0.91 (0.00) 0.66 (0.00) 1.00 (0.00) 0.96 (0.00) 0.77 (0.00) 1.00 GFCE 0.94 (0.00) 0.65 (0.00) 0.96 (0.00) 0.96 (0.00) 0.88 (0.00) 0.88 (0.00) 1.00 D. Investigating the order of integration Table: 4 LLC results test at level Table : 5 LLC results at first difference Levin, Lin &Chu test (At first difference) variables intercept Intercept and trend Statistic Probability Statistic Probability RGDP -3.93918 0.0000* -12.4508 0.0000* LF -3.00414 0.0000* -7.14370 0.0000* GCAF -8.99304 0.0000* -10.3162 0.0000* FDI -22.3298 0.0000* -16.7172 0.0000* EDT -5.22198 0.0000* -9.66518 0.0000* GDSA -11.5291 0.0000* -12.1451 0.0000* GFCE -7.20418 0.0000* -11.1880 0.0000* *exhibits the rejection of Null Hypothesis (stationary data) Table 4 exhibits the results of LLC Panel unit root test both at individual intercept and individual intercept with trend. The econometric outcomes shows that null hypothesis is accepted which indicates the presence of unit root. Therefore, data for all selected variables is non-stationary at level while results of Table 5 show that all the selected variables became stationary at first difference. On the other way, all the macroeconomic variables have not unit root and integrating at the first order. D. Panel co-integration Tests Table: 6 Results of Johansen Fisher Panel Co integration Test Hypothesized No. of CE(s) Fisher Stat.* (from trace test) Probability Fisher Stat.* (from max-Eigen test) Probability None 1,379.00 0.00 1,449.00 0.00 At most 1 1,124.00 0.00 574.80 0.00 At most 2 700.60 0.00 351.70 0.00 Levin, Lin& Chu test(At level) variables Intercept Intercept and trend Statistic Probability Statistic Probability RGDP 20.6430 1.0000 2.97653 0.9985 LF 15.3920 1.0000 -0.22235 0.4120 GCAF 12.4401 1.0000 1.19839 0.8846 FDI 3.27091 0.9995 -1.71348 0.0433 EDT 13.3757 1.0000 9.02749 1.0000 GDSA 6.71047 1.0000 1.1830 0.8815 GFCE 17.6822 1.0000 4.96960 1.0000 Review of Economics and Development Studies Vol. 3, No 2, December 2017 118 At most 3 422.90 0.00 229.50 0.00 At most 4 239.20 0.00 140.90 0.00 At most 5 151.20 0.00 131.10 0.00 At most 6 96.64 0.00 96.64 0.00 * Probabilities are computed using asymptotic Chi-square distribution. Table 6 exhibits findings 0f Johansen Fisher Panel Co integration test. The first column depicts the Hypothesized number of Co-integrating equation from none to at most six. Second & Forth columns carries the values of Fisher statistics while third and fifth columns shows the respective probability values. Values of fisher statistic are designed with regards to “trace” & “Maximum Eigen statistics”. As per probability values given in third and fifth column, the analysis clarifies about the rejection of H0. All the explained and explanatory variables have co-integration. E. Fully Modified OLS result Table 7 Results of FMOLS method Variable Coefficient Std.Error T-statistic Prob. LF 842.68 73.76 11.42 0.00 GCAF -1.62 0.53 -3.05 O.00 FDI 4.03 1.41 2.85 0.00 EDT 2.13 0.20 10.67 0.00 GDSA 1.67 0.49 3.37 0.00 GFCE 0.66 0.37 1.78 0.08 C -9,474.32 10,682.4 -0.89 0.38 R-squared Adjusted R-Squared 0.97 0.97 Mean dependent var. S.D. dependent var. 249,918.80 563,368.40 Interpretation of FMOLS results Above table depicts the Fully Modified OLS results for 25 region wise selected developing nations. The outcomes are as per expectations. Coefficient of Labor is positive and considerable significant because when Labor force goes up by one unit then economic growth will go up by 842.68 units. Its justification is quite clear that rise in units of labor force pull the real gross domestic product in upward direction. This impact might be due to high rate of participation. As the labor force is increasing, participants in economic activity are also increasing. Therefore, due to such addition of participants, high economic activity leads to high economic growth. This result is consistent with the studies of Zekarias (2016).Coefficient of GCAF have negative and insignificant relationship with GDP. Moreover, foreign direct investment has a significant positive association with RGDP because according to findings, when FDI increases by one unit then it will expand the economic growth by 4.03 units. FDI is found to have positive impact on economic growth because; foreign direct investment is a great source of establishment of new industries in developing nations. It is also helpful in job creation and poverty reduction process. Positive effect of FDI on economic growth is supported by the literature Ndambendia and Njoupouognigni (2010), Pradhan (2009), Asghar et al. (2011), Agrawal and Khan (2011), Khachoo and Khan (2012), Zakari et al. (2012), Zeb et al. (2013), Jun (2015), Agrawal (2015), Zekarias (2016). External debt has considerable positive association with RGDP as per study, because one unit rise in external debt brought 2.13 units rise in Economic growth. External debt has a positive influence on Review of Economics and Development Studies Vol. 3, No 2, December 2017 119 growth of developing nations as per finding. The developing nations usually face the dual gap (internal and external gap) and internal financial possessions are insufficient to bridge that gap. Hence, External debt for developing nations is a major source to meet the financial needs and accelerate the economic growth. Positive correlation between external debt and economic growth is supported by studies of Chenery and Strout (1966), Frimpong and Abayie (2006), Sulaiman and Azeez (2012), Rahman et al. (2012), Kasedi and Said (2013). F. Pair wise Granger Causa1ity Test Table: 8 Results of Pair wise Granger Causa1ity Test Null Hypothesis: Obs. F-Stat. Prob. LF does not Granger Cause RGDP 575 44.58 0.00 RGDP does not Granger Cause LF 575 25.08 0.00 GCAF does not Granger Cause RGDP 575 19.37 0.00 RGDP does not Granger Cause GCAF 575 81.36 0.00 FDI does not Granger Cause RGDP 575 9.36 0.00 RGDP does not Granger Cause FDI 575 57.36 0.00 EDT does not Granger Cause RGDP 575 38.23 0.00 RGDP does not Granger Cause EDT 575 22.99 0.00 GDSA does not Granger Cause RGDP 575 13.59 0.00 RGDP does not Granger Cause GDSA 575 98.37 0.00 GFCE does not Granger Cause RGDP 575 24.33 0.00 RGDP does not Granger Cause GFCE 575 63.60 0.00 GCAF does not Granger Cause LF 575 18.75 0.00 LF does not Granger Cause GCAF 575 29.26 0.00 FDI does not Granger Cause LF 575 17.59 0.00 LF does not Granger Cause FDI 575 23.21 0.00 EDT does not Granger Cause LF 575 0.42 0.00 LF does not Granger Cause EDT 575 29.14 0.00 GDSA does not Granger Cause LF 575 16.58 0.00 LF does not Granger Cause GDSA 575 24.58 0.00 GFCE does not Granger Cause LF 575 11.37 0.00 LF does not Granger Cause GFCE 575 23.52 0.00 FDI does not Granger Cause GCAF 575 19.20 0.00 GCAF does not Granger Cause FDI 575 12.71 0.00 EDT does not Granger Cause GCAF 575 2.56 0.08* GCAF does not Granger Cause EDT 575 26.65 0.00 GDSA does not Granger Cause GCAF 575 72.96 0.00 GCAF does not Granger Cause GDSA 575 37.58 0.00 GFCE does not Granger Cause GCAF 575 1.25 0.29* GCAF does not Granger Cause GFCE 575 26.61 0.00 Review of Economics and Development Studies Vol. 3, No 2, December 2017 120 EDT does not Granger Cause FDI 575 5.99 0.00 FDI does not Granger Cause EDT 575 16.17 0.00 GDSA does not Granger Cause FDI 575 20.48 0.00 FDI does not Granger Cause GDSA 575 9.41 0.00 GFCE does not Granger Cause FDI 575 21.51 0.00 FDI does not Granger Cause GFCE 575 33.55 0.00 GDSA does not Granger Cause EDT 575 30.60 0.00 EDT does not Granger Cause GDSA 575 2.25 0.11* GFCE does not Granger Cause EDT 575 35.86 0.00 EDT does not Granger Cause GFCE 575 2.78 0.06* GFCE does not Granger Cause GDSA 575 10.07 0.00 GDSA does not Granger Cause GFCE 575 35.47 0.00 *exhibits the acceptance of null hypothesis (no causal relationship) Table: 8 interpreted the causal relationship among variables. It declares that there exists uni and bi directional causality among variables. Figure 3 Diagrammatical representation of pair wise granger causality results Review of Economics and Development Studies Vol. 3, No 2, December 2017 121 Elucidation: Figure 3 elucidates the pair wise granger causal relationship between the variables. The arrow sign depicts the direction of causality. All the above figures show the bidirectional causal association between the selected variables except the figure (i), (m), (s) and (t). Figure (i) explain the unidirectional causality between LF and EDT because Labor force causes the external debt while EDT does not cause the LF. Figure (m) explicates the one-way causal link between EDT and GCAF because GCAF cause the EDT while external debt does not cause the GCAF. 6. Concluding Remarks, Policy Implications and future prospects Panel unit root tests suggest that the entire selected variables are stationary at the level of first difference, meaning that all the variable have I(1) integrating order. The results of “Johansen Fisher Panel Co integration test” reveal that, there exists a long period relationship among all the explained and explanatory variables. Findings of “Fully Modified OLS” method declared that, both the FDI and external debt have significant positive association with the economic growth in the case of 25 region wise classified developing economies. So, the study declares that, the effect of foreign direct investment is outstanding than external debt on the growth of developing nations because one unit rise in FDI raise the growth by 4.03 units while one unit rise in external debt upgrade the growth up to 2.13 units. It means that boundaries of selected developing nations are absorbent to FDI than external debt. Furthermore, Units of labor have considerable positive association with economic growth. Furthermore, negative impact of the capital stock and significant positive impact of gross domestic saving on economic growth has noted during span 1990-2014 in the case of developing countries. Pair wise granger causality test has been employed for analyzing the uni and bi directional causal relation among selected variables. Results of this study are likely to make available a prospect to structure several policy implications. Both the FDI and Review of Economics and Development Studies Vol. 3, No 2, December 2017 122 external debt contributes positively to the growth in context of some selected developing countries. Therefore, the government should positively focus on utmost use of possessions to boost FDI inflows and proper utilization of external debt to augment the economic growth. This study provides suggestions that how to improve the structure of developing nation to attract more FDI in order to upgrade the economic growth. Host countries should provide the business-welcoming atmosphere to the foreign investors to be a magnet for huge FDI. For this purpose, developing nations must have to mounting skilled and educated personnel, provision of Jobs to uneducated people as per their skills. Moreover, safety of foreign investors and appropriate structure of tax also captivate massive foreign investment. Since agriculture sector is backbone in most of developing nations but deficient financial sources leads to the usage of poor techniques of production and low quality inputs in this sector. Huge amount of FDI can provides finance to modernize the structure of agriculture sector in developing countries. External debt should to be use for productive projects and returns from that projects must be higher than its cost. Government of developing nations should make certain about stability in both economical and political aspects in order to minimize the debt burden and enjoying its fruitful effects on growth. Intention of government strategies must be positive while acquiring the external debt, meaning that it should borrow just for the welfare of their nations rather than for political purposes. This study opens the gate for new research in term of following. There is always a bench mark to judge performance like in this case if we make comparison with developed countries it will defiantly opens doors for crucial elements to surface up, which helps to device a comprehensive plan for economies to set objectives for their economic growth as this study covered with only developing countries without making comparisons. Future research required to elaborate the consequences of external debt and FDI in term of incorporating relationship of both core variables. References Agrawal, G., & Khan, M. A. 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