Neglected heterosecdasticity on foreign direct investment outcomes and employed labor force in South Asia

Mehmood, Khawaja Asif; Sallahuddin Hassan Article Neglected heterosecdasticity on foreign direct investment outcomes and employed labor force in South Asia Pakistan Journal of Commerce and Social Sciences (PJCSS) Provided in Cooperation with: Johar Education Society, Pakistan (JESPK) Suggested Citation: Mehmood, Khawaja Asif; Sallahuddin Hassan (2017) : Neglected heterosecdasticity on foreign direct investment outcomes and employed labor force in South Asia, Pakistan Journal of Commerce and Social Sciences (PJCSS), ISSN 2309-8619, Johar Education Society, Pakistan (JESPK), Lahore, Vol. 11, Iss. 2, pp. 542-558 This Version is available at: https://hdl.handle.net/10419/188304 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc/4.0/ Pakistan Journal of Commerce and Social Sciences 2017, Vol. 11 (2), 542-558 Pak J Commer Soc Sci Neglected Heteroscedasticity on Foreign Direct Investment Outcomes and Employed Labor Force in South Asia Khawaja Asif Mehmood (Corresponding author) School of Economics, UUM College of Business, Universiti Utara Malaysia Email: [email protected] Sallahuddin Hassan School of Economics, UUM College of Business, Universiti Utara Malaysia Email: din63[email protected] Abstract The elemental intend of the study is the clarification on the employment effect of inward Foreign Direct Investment (FDI). The challenges faced by the developing economies, of which South Asia (SA) is not away, in context of the measures to have maximum absorptions of the existing labor force are however easier said than to be done. The study opts four of the big economies of SA for the realization of FDI and employment tie-ups. The data range for 31 year, since start from 1980. It is nevertheless striking to bring into practice the altogether computation of more than one regression equation. To do so, methodology of Seemingly Unrelated Regression (SUR) is used and thereby establishes three salient outcomes: a); FDI is significant in effecting employment, b); FDI effects of employment are moderate, c); FDI tends to have dissimilar direction of effects on the selected countries. At the concluding stage, it is suggested to view sector specific effects of FDI and nevertheless recommended for the righteous channelization of foreign capital for better job enhancement. Keywords: foreign direct investment, employed labor force, South Asia, gross domestic product, Seemingly Unrelated Regression, Feasible Generalized Least Squares. 1. Introduction 1.1 Background of the Study Joblessness is one of the critical macroeconomic aspects of world. The situation turns to be more of pity when evident on the developing world economies (Coniglio et al., 2015). Reported by International Labor Organization (ILO, 2016), although unemployment pressures have fallen in some of the developed economies i.e. European Union (EU) and United States (US), however, to new ILO analysis of World Employment and Social Outlook (WESO, 2016), the global crisis of particularly related to labor force absorptions is not likely to come to an end, especially for the emerging economies. Such inflated figures of jobless labor deeply affect the bunch of workable labor force available at plentiful. Nearly, 1.1 million of jobless labor is likely to be in the global tally by 2017 (WESO, 2016). Despite of thorough joblessness, it is seen that people are self-triggered Mehmood & Hassan 543 towards accepting underpaid jobs or instead to be laid-off. It needs to boost decent work opportunities either or else intensify social tensions. Locating the back stage causes of such intensified issues of labor force, associations are traced at prevalence of unstable economic environment, dysfunctional financial and stock markets, the fall of demand of labor from entrepreneur since heading towards investment shrinks, and above the board, volatile flow of foreign capital are the major contributors to an abrupt situations at labor market. Vulnerable and low paid employment is undeniably high in the emerging as well as developing economies with its point of peak in SA i.e. 74 percent and Sub-Saharan Africa by 70 percent (ILO, 2016). Employment and participation rate in the sectors of productive absorption is at plunk in SA. Of eight countries comprised into South Asian Association for Regional Cooperation (SAARC), entire economies are reliant on primary sector thus are not able to hold-up- tight the multiple and higher than subsistent level of jobs. For the sake of relying on authentic information and data availability, this study involves four countries of SA i.e. India, Pakistan, Bangladesh, and Sri Lanka. SA adds about 1 to 1.2 million of value addition in labor force every month and is to contribute to 40 percent into the global working age of (15-64) years (World Bank, 2016). To assemble the available work force in the queue of in-job citizens, investment capital is inevitable. 1.2 Foreign Direct Investment, Employment, and Labor Force in South Asia The ready source of coming over capital needs for gearing up employment opportunities is nevertheless through FDI. To Sahoo (2006), locating for the evolution of FDI policies in India, gradual changes emerged into the government attitude towards of FDI since 1948. The foreign exchange crisis during 1957-58 also led India towards of being more liberal in the case of FDI. By the era of 1970’s and of 1980’s, more of the liberalized attitudes towards of FDI were followed. Also, by 1990 and onwards, since grounded at globalized front of exchange of investment capital, India today is the most attractive economy for foreign investments in SA. At Pakistan, the first leap towards of liberalizing FDI was embarked in 1984 that declared for the equal floorboard for the public as well as private sector, thus, favored foreign investments by joint equity and partnership with local businesses. Establishment of privatization commission by early 1990’s was the prompt step towards the initialization of private investments (local and foreign) to spread out the business within the path of futuristic plans towards further liberalized and open bordered tie-ups. Tilat (2002) writes that despite of too much of the favors given to the foreign investors, the performance of Pakistan in attracting bulk of such foreign inflows remained muted and indeed dismal, mainly due to the lack of concrete reforms on tax exemptions and other concessions that lead to concrete the fundamentals of attracting foreign investors. In case of Sri Lanka, since 1948, the FDI penetrations are seen in two phases that is of pre 1977 and of post 1977 period. The former episode was looked by dominant public sector and later phase was of launching of economic reforms with primary aim of favoring private sector-led country future productive horizons, resting at vibrant role of FDI. The policies involved; easing off trade and payments, administrative adjustments, tax reliefs and administrative favors related to FDI. Situations are not that away in Bangladesh where FDI is bucked-up at all the industrial activities except that of arms and ammunitions, mechanized extractions of reserved forests, nuclear energy, currency notes, Neglected Heteroscedasticity on FDI Outcomes & Employed Labor Force 544 forest plantation however, possibly by a joint venture with that of public sector. Favoring of FDI is reliant on foreign private investment act of 1980 that aims at creation of indiscriminatory incentives to foreign investment (Sahoo, 2006). Ease of capital is a key determinant of employment creation. However, of the four countries of SA, the statistics of total FDI inflows in Table 1 spells out that India is the biggest tycoon in adhering maximum inflow of FDI. Out of total FDI inflows of US$46.90 billion in Fiscal Year (FY) 2015 within the specific countries, India witnessed for US$40.0 billion. In case of the rest, Pakistan came up with US$2.73 billion next to which is Bangladesh with $2.57 billion and Sri Lanka at the lowest rank i.e. of US$1.60 billion (FY, 2015). At the world, FDI inflows are at volatile trend i.e. to World Bank (2016), net inflows of FDI at percentage world’s GDP declined from 5.17 percent to 2.17 percent from 2007 to 2009. Onwards, there are couples of appreciations recorded into the growth of such inflows, i.e. 2.78 percent to 3.02 percent in coming two years span and nevertheless with sharp decline in 2014, reaching at 2.07 percent. In 2015, inflows of FDI remained at 2.72 percent. In this respect, FDI inflows as percentage of GDP situated at 2.10 percent on account of India whereas in Pakistan only 0.40 percent. Bangladesh and Sri Lanka witnessed FDI inflows at 1.70 and 0.80 percent of their respective GDP (World Bank, 2016). Table 1: Total Receivables of FDI during Fiscal Year 2015 (In Billion US$) India Pakistan Bangladesh Sri Lanka Total FDI inflows US$46.90 billion 40.0 2.73 2.57 1.60 Flow of FDI as percentage of GDP (In percentage) India Pakistan Bangladesh Sri Lanka 2.10 0.40 1.70 0.80 Source: The World Bank Group (2016) The countries in SA also account for peaked level of population and due to the reason that being highly populated, are self-lead towards of the challenges at macroeconomic level. The growing trend in total population comes along with the needs of further investment for the restoration of the current rate of labor force participation as well as to keep the unemployment rate at least steady. Of the four countries of SA, as highlighted in Table 2, India is entitled to be the most populous due to the size of the country. Mehmood & Hassan 545 Table 2: Population, Labor Force, and Unemployment during Fiscal Year 2015 Total Population (In Million) India Pakistan Bangladesh Sri Lanka 1311.0 188.9 160.9 20.7 The Available Labor Force 15 Year and Above (In Thousand) India Pakistan Bangladesh Sri Lanka 496960.16 65361.41 78976.78 8576.33 Labor Force Participation Rate 15 Year And Above (In Percentage) India Pakistan Bangladesh Sri Lanka 54.0 55.0 71.0 55.0 Rate Of Unemployment (In Percentage) India Pakistan Bangladesh Sri Lanka 3.5 5.9 4.3 4.7 Source: The World Bank (2016); World Ometers (2016); Trading economics (2016) Population of Pakistan comes at second whereas, of Sri Lanka, it is the lowest, after that of Bangladesh. To the obvious reason, highly populous states are tied-up with the bulky labor force. The scenario of available labor force of particularly 15 years and above for FY (2015) shows that in India it is nearly half of the billion. It is further astonishing to note that in Bangladesh, the available labor force is higher than that of Pakistan though being lesser in total population to Pakistan. It spells out the variations of classifications of population on account of age parenthesis. The labor force participation rate is formulated to be employed over total labor force. In case of India, Pakistan, and Sri Lanka, it is not widely dissimilar to each other. However, in case of Bangladesh, it is the highest in the category. Rate of unemployment is quite low in India at FY (2015), however, given that unemployment measures are concerned, India witnessed too high unemployment rate during 2009 to 2013. It was averaged above 6 percent. Couple of years back, rate of unemployment in Pakistan also lived at over average 6 percent. Currently it is 5.9 percent (FY, 2015-2016). In case of Sri Lanka it is higher than that of India as well as Bangladesh. Again due to the need of work engagements, Bangladesh though adheres to hefty underemployment and low paid jobs, therefore, assembles herself with lowest rate of unemployment. While targeted employment growth is to depend on FDI, there must be a compound watch on the size of the total inflows, the direction(s) of such vital investments, and the sector(s) those are the beneficiaries. In most of the cases, the blessing of FDI is viewed in the recipient state at the back of realizing economies of scale, transfer of technologies and the know-how that get evident on the local industries. Being not different from the rest of developing economies, SA is a source of attraction for the foreign businesses for sufficient transfer of credit to make their horizon widened side by side with the transpositions in the sense of entangling macroeconomic improvements within the country of host. Neglected Heteroscedasticity on FDI Outcomes & Employed Labor Force 546 The information disembarked in Table 3 is on the glove of FDI towards the selected countries of SA. For the immense grabber of FDI inflows in SA, India has largest receivables of US$ 9497.0 million of investments funds from Mauritius. However Singapore and Japan are the close competitors in exporting investment funds to India and nevertheless Netherlands. The flow of funds over US$ one billion is from the U.K. The sector-wise allocation, locating for the biggest five, shows that services sector is of maximum scope for the business thereby engages the foreign investment of US$ 4833.0 million. The investment is so much divergent that construction sector which comes at second is at the receivables of one third of the funds compared to the services sector. The drugs and pharmaceutical sector along construction sector account for the foreign investment of about US$ 2.4 billion. Additionally, computer software and hardware together with telecommunication account for compound foreign investment of US$ 790 million. China is the major business partner to Pakistan. It is therefore seen that heavy investment is pledged worth US$ 255.3 million, during FY (2015). Moreover, U.A.E and USA are also to stand at the floorboard of significant contributories of foreign investment with the total of US$ 425.4 million. Other partners enlisted in top five sources of inflows of FDI to Pakistan are USA, U.K and Hong Kong. It is however satisfactory to view that ever since Pakistan faces severe energy crises current days, majority of the investment funds is thrown into the power sector. Next to which is the oil and gas sector that also make crucial for Pakistan to get hold of targeted GDP and industrial and agriculture sector growth. This sector is also getting investment of US$ 261.6 million. Such heavy investment can be a spark to gear up for getting over the energy shortages within the country. Amongst the category of sectors of consideration for FDI, transport, chemicals and communication (IT and telecom) are the flashy beneficiaries. Mehmood & Hassan 547 Table 3: FDI Inflows; Top Five Source Countries and Domestic Sector-Wise Allocation in Million US$ (Fiscal Year, 2015) India Source Countries Domestic Sector-wise Allocation Country FDI Sector Total Investment Mauritius 9497.0 Services 4833.0 Singapore 2308.0 Construction 1332.0 Japan 2237.0 Drugs and Pharmaceuticals 1123.0 Netherlands 1856.0 Computer Software & Hardware 486.0 U.K 1080.0 Telecommunication 304.0 Pakistan Source Countries Domestic Sector-wise Allocation Country FDI Sector Total Investment China 255.3 Power 566.6 U.A.E 216.4 Oil and Gas 261.6 USA 209.0 Communication (IT & Telecom) 195.2 U.K 174.3 Chemicals 64.6 Hong Kong 83.4 Transport 36.8 Bangladesh Source Countries Domestic Sector-wise Allocation Country FDI Sector Total Investment U.K 273.6 Banking 389.6 USA 224.6 Textile and Wearing 351.6 Singapore 135.2 Gas and Petroleum 199.5 South Korea 131.4 Telecommunication 197.2 Pakistan 120.8 Food 96.6 Sri Lanka Source Countries Domestic Sector-wise Allocation Country FDI Sector Total Investment Netherlands 1851.0 Manufacturing 199.0 U.K 1131.0 Tourism 161.0 Malaysia 841.0 Housing and Property Development 116.0 Switzerland 829.0 Telecommunication 93.0 Mauritius 783.0 Port Development 51.0 Sources: Board of Investment, Government of Pakistan; Department of Industrial Policy and Promotion, Government of India; The Central Bank of Bangladesh; Board of Investors, Sri Lanka. Neglected Heteroscedasticity on FDI Outcomes & Employed Labor Force 548 In Bangladesh, U.K and USA are the top countries favoring the export of capital funds. To recall, USA and U.K both are the states that are the contributors of heavy funds, in Pakistan and India, account for about an investment of US$ 498.2 million. Singapore and South Korea are not that away from one another in targeting Bangladesh for their FDI outflows. It is viewed that Pakistan also falls among the likely top five FDI sources to Bangladesh with an investment of over US$ 120 million. The targeted sectors for the investment are mainly banking, textile and wearing, gas and petroleum, telecommunication, and food. With a total investment of US$ 1234.55 million, more than half of the foreign investment is viewed at banking and textile and wearing. Next to India, Netherlands, U.K and Mauritius are listed in five most favored nations for foreign investment in Sri Lanka. Precisely, Netherlands exhibit for the strong layover of funds that are US$ 1851.0 million. U.K is the second partner at FDI that account for US$ 1131.0 million. Likely to Mauritius, Malaysia and Switzerland be along investment of over US$ 1.6 billion during FY (2015). Most of the attentions are evident towards the manufacturing sector of Sri Lanka where the land of total imported investment funds are of US$ 199.0 million. Tourism is an attractive sector of Sri Lanka, depending on the climate, location for world biggest beaches, Sigiriya the eighth wonder of the world and scenic(s) are the reason for the second highest recipient of FDI whereas, housing and property development and telecommunication account for US$ 209 million and nonetheless, port and development at far most however, be at the selected list of category. 1.3 Significance and Scope of the Study While noticing for the significant flow of FDI into the SA, it therefore motivates to view the feedback effects of the same on the employed labor force of the recipient countries, given that SA is the region of grouped nations those share a common attribute of rising labor force and limited capital thus come along low power of advocacy towards the proper engagement of economic activities so that results could be ultimately on the triggering of the jobs for the available labor force. The notion that whether FDI is to be considered as to mend-up the breaches of saving and investment; thus encourages to initiate the study to award empirical rationing on the relationship and the direction of effects on the employed labor force of SA. It is none other than to verify for whether current employed labor force in SA is workable at the back of FDI or else, given such gestures shown before foreign firms for the investment of funds and is nevertheless considered as instrument of hope for the entire economy. Whether the effects are apprehend-able or just froth, since availability of jobs to the labor force is the common issue in the region. The study goes along with the organization of Section 1 on the Introduction, the Section 2 that enlightens the Review of Literature. Section 3 is on the Data Source(s) and Methodological issues. Section 4 and Section 5 are rendered for the Discussion of the Results and Conclusions. 2. Review of Literature The FDI is successful in its wide-spread myth of effecting the host country’s economic growth and nevertheless in positive (Thomas, Li, & Liu, 2008; Farkas, 2012). To Kobrin (2005), the effects are idealized at the transfer of new technologies that enhance the productive capacity of the economy via the employment creation at intermediate state. Therefore, productive and allocative efficiencies are restored that positively contribute to Mehmood & Hassan 549 the macroeconomic aspects (Mehmood & Hassan, 2015). Gaps fill experiences resting on FDI, on account of savings and investment raise the investment level even to be mounted above the existing level of saving, at domestic forefront (Hye et al., 2010; Mehmood & Hassan, 2015; MacDougall, 1960). The general themes of the empirical researches are classified into two groups. That is; the visualization of FDI and economic growth relationship and of FDI and its effects on the employment. In this regard, Khan and Khan (2011) empirically tested for the evidences on the FDI and economic growth at Pakistan. The study went out with the sector-wise analysis i.e. of primary, secondary and tertiary sector. The results were found to posit positive relationship of the two, likely to (Hye et al., 2010). In the same framework of analysis, however, different results were also evident in past research. For instance, Baharumshah and Thanoon (2006) found within the Error Correction Model (ECM), negative signs of foreign inflows thus representing to displace the domestic investment and saving in short run. Since GDP effects of FDI are concerned, though assemble positive ties, however, there’s practiced different methodologies and sector(s) of interest. Mehmood and Hassan (2015) tested for economic growth effect of FDI on economic growth of Pakistan by using Johansen and Juselius (1990). The study was based on data from 1972 to 2014. Whereby, Hye et al. (2010) worked with Auto Regressive Distributed Lag (ARDL) for analysis of FDI and economic growth of Pakistan for 1975 to 2007. However, Khan and Khan (2011) came up using panel cointegration test for 1981 to 2008, while focused on sectoral analysis on Pakistan, at the back of FDI. Whilst Baharumshah and Thanoon utilized data from 1982 to 2001 and augmented methodology of Dynamic Generalized Least Squares (DGLS) on eight Asian countries to test for FDI effects on economic growth. Broad spectrum of the effects of FDI on the macroeconomic stature of host country motivates the researchers to also look for employment effects of the same. In this area, Habib and Sarwar (2013) estimated the regression through Johansen and Juselius (1990). The results evident for the two cointegrating equations thus confirmed for the long run relationship between the employment level and FDI in Pakistan. Varying with the data range within 1970 to 2011, positive relationships were found amongst the two. In addition to that, Akcoraoglu and Acikgoz (2011) had a fundamental aim to explore the effects of inflows of FDI on the employment, considering the choice of Turkey for their empirical analyses. The methodology worked-with was of ARDL, akin to Mehmood and Hassan (2015); Hye et al. (2010) and Ali and Nishat (2009). Results incorporated by Akcoraoglu and Acikgoz (2011) proved of significant negative relationship of FDI and the employment for which the probable reason quoted was the inflows of FDI in the form of acquisition and mergers instead of green-field investments. Similarly, Jude and Silaghi (2016) explored for association of FDI and employment at the panel of Central and Eastern European countries. Findings identified that FDI had initial negative effects of labor saving on employment. Whereas, long run vertical integration of the foreign affiliates brought positive spell outs on employment. 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