Executive Summary
Inflation and FDI are two economic factors that have marked influence on the economic growth of a country in the form of GDP. Normally, the performance of multinational enterprises has intricate links with GDP, inflation, and FDI. The study hypothesized that inflation and FDI have different effects on the GDP of developed and developing countries. Thus, the study aimed to establish the influence of inflation and FDI on the GDP of a developed country (Japan), developing country (Mexico), and the world. The study obtained data on inflation, FDI, and GDP (1960-2017) from the World Bank Databank and the United Nations Conference on Trade and Development. SPSS software was used to generate descriptive statistics and perform correlation analysis and regression modeling. Additionally, Tableau was used to visualize trends and patterns of data over time. The findings demonstrated that GDP has a negative relationship with inflation, but it has a positive relationship with FDI. Regression analysis illustrated that inflation and FDI account for 89.5%, 57.5%, and 86.8% of the variation in GDP in Mexico, Japan, and the world respectively. Thus, the study recommends multinational enterprises to consider the effects and trends of inflation and FDI in selecting locations for establishment in developed and developing economies.
Introduction
Introduction and Justification
The gross domestic product (GDP) is one of the main parameters that economists employ in assessing economic growth and development of a country. It reflects the number of goods and services that a country produces in a specific period, usually a year (Alshamsi, Hussin & Azam 2015). As an economic indicator, GDP is sensitive to changes in economic factors at local, national, and international levels. Alomari and Azzam (2017) explain that multinational companies experience different effects of micro- and macro-economic factors because they operate in diverse economic environments. Inflation has negative effects on GDP because it decreases the value of money and reduces the consumption level of goods and services (Svigir & Milos 2017). Additionally, foreign direct investment (FDI) has positive effects on GDP since it creates employment opportunities, promotes the production of goods and services, and increases the purchasing power of individuals (Guechheang & Moolio 2014; Kirti & Prasad 2016; Abbas & Xifeng 2016). In this view, it is apparent that inflation and FDI are economic factors that determine the GDP of a country. Since economic factors vary from one country to another, there is a need to compare the effects of inflation and FDI on a global level, developing countries, and developed countries.
Importance and Research Gaps
In this era of globalization, the understanding of the effect of inflation and foreign direct investment on GDP is important to multinational enterprises and global industries. Although theories elucidate that inflation has a negative influence on GDP, empirical studies have demonstrated the existence of positive and neutral effects (Svigir & Milos 2017). Varied effects of inflation are dependent on the economic stance and characteristics of countries. Inflation has negative effects on GDP in developed countries (Akinsola & Odhiambo 2017), but it has positive effects on GDP in developing countries (Svigir & Milos 2017). The existence of varied effects of inflation and FDI is a research gap that requires elucidation to establish the extent to which they influence GDP in both developing and developed countries.
Report Objectives and Structure
Since the study seeks to compare the effects of inflation and FDI on GDP, it selected Japan and Mexico to represent developed and developing countries respectively. However, Japan and Mexico have almost the same size of the population. Comparatively analysis of the effects of inflation and FDI on the GDP of these countries relative to the global level provides a comprehensive trend of GDP. Therefore, this report examined the literature review, collected secondary data from online databases, performed data analysis, and discussed the findings.
Research Objectives
- To determine how inflation and FDI influence GDP in Mexico.
- To determine how inflation and FDI influence GDP in Japan.
- To determine how inflation and FDI influence GDP at the global level.
Literature Review
Critical Overview of Concept
Numerous economic theories elucidate the complex effects of inflation on economic growth. Fiscal policies that countries make aim to stabilize the inflation rate at low levels and optimize economic growth (Asteriou & Hall 2015; Ahmad, Afzal & Ghani 2016). The quantity theory of money predicts that inflation increases as the quantity of money and the purchasing power of consumers increase (Koti & Bixho 2016). The liquidity preference theory also explains the occurrence of inflation in a country. According to this theory, the preference for liquidity increases the demand for money and increases inflation (Koti & Bixho 2016). Hence, the supply and demand for money determine the inflation rate and subsequently influence economic growth.
The exchange rate theory holds that FDI inflows determine the strength of currencies in the global financial markets (Oppong 2018). Differences in the strengths of currencies explain why developed and developing countries have a dissimilar attraction to FDI. Oppong (2018) asserts that countries with stronger currencies tend to attract low FDI than countries with weaker currencies. Moreover, the internationalization production theory postulates that countries have become part of the global village that is subject to globalization forces (Wen & Lyun 2015). This theory shows that multinational enterprises operate in global markets, which are under the control of complex economic factors.
Owing to the existence of diverse economic factors such as the population, natural resources, economic activities, technology and regulations, inflation, and FDI, GDP varies from one country to another. The classical theory elucidates that a country can perform optimally by utilizing all of its resources to attain real GDP (Eltis 2016). In essence, the theory holds that economic growth is under the mechanism of self-adjustment. According to Say’s Law, an economy of a nation generates GDP that is equivalent to the purchasing ability of individuals based on their income (Akinsola & Odhiambo 2017). An imbalance in the real GDP and the level of income reduces economic growth.
Critical Overview of Empirical Literature
An extensive literature review reveals that the relationship between inflation and economic growth is complex because it varies from one country to another, depending on commercial characteristics (Akinsola & Odhiambo 2017). Although the dominant view is that inflation has a negative effect on economic growth, it has a positive influence in some countries. In their literature review, Akinsola and Odhiambo (2017) observed that inflation seems to support economic growth in developing countries, but tends to decrease the economic growth in the developed countries. Further studies to determine the influence of inflation on GDP confirmed the existence of mixed-effects (Akinsola & Odhiambo 2017; Tahir, Khan & Shah 2015). Regression analysis demonstrated that interest rate and inflation rate account for 32% of the variation in GDP in India (Bhat & Laskar 2016). Svigir and Milos (2017) conducted an empirical study on Austria and Italy and established that inflation has no significant impact on economic growth, particularly in countries that have experienced low inflation rates for the long-term.
In their study to determine factors that influence GDP components in the Indian context, Jain, Nair, and Jain (2015) found out that FDI has a significant influence on economic activities in the manufacturing and service industries. In another study done in Cambodia, Guechheang and Moolio (2014) established that FDI has a statistically significant positive influence on GDP because it has aided in the sustenance of growth rate by 7% for 19 years. FDI creates employment opportunities, reduce unemployment, and promote the purchasing power of consumers, leading to increased consumption of goods and services.
Conceptual Framework
The conceptual framework (Figure 1) depicts the comparative analysis of how the inflation rate and FDI influence the GDP of Mexico, Japan, and the world.
Methodology
Data Collection Strategy
The data collection strategy entailed searching for secondary data in online databases. Secondary data offer data in the form of time series, which allows the determination of descriptive statistics, correlation scrutiny, and regression analysis (Saunders, Lewis & Thornhill 2015). Additionally, Secondary data provide comprehensive information because they span over five decades.
Data Sources and Variables
The inflation, FDI, and GDP are three variables that the study created. The inflation and FDI are independent variables, whereas GDP is the dependent variable of the study. Hence, the study collected data of inflation, FDI, and GDP from the databases of the World Bank and the United Nations Conference on Trade and Development because they contain annual economic data from 1960 to 2017 (World Bank 2018; United Nations Conference on Trade and Development 2018). To enhance the external and internal validity of the findings, the study selected data covering 58 years.
Data Analysis Strategy
The study analyzed data using SPSS software and Tableau because they have numerous functions for visualizing and calculating descriptive and inferential statistics. In the exploratory data analysis to establish patterns and trends of data, the study employed descriptive statistics (Ozdemir 2016). The study then used correlation analysis to determine the strength and the direction of association with the view to predicting causal-relationships (Hellwig 2014). Subsequently, the study employed regression analysis as inferential statistics to determine the significance of inflation and FDI on influencing GDP.
Data Analysis
Descriptive Statistics
Descriptive Statistics of Mexico
Table 1 below depicts descriptive statistics of inflation, FDI, and GDP of Mexico over the past 58 years. Descriptive statistics indicate that Mexico has an inflation mean of 19.81% (SD = 12.61%), FDI mean of $10.39 billion (SD = $12.63 billion) and GDP mean of $434.76 billion (SD = $425.12 billion).
Figure 2 depicts trends of inflation, FDI, and GDP of Mexico over the past 58 years. Inflation declined from about 4% in 1960 to approximately 3% in 2017 with a marked fluctuation in the 1980s. FDI has increased gradually over time from about $2 million to around $30 billion in 2017 with significant fluctuations in the past two decades. GDP also increased gradually from approximately $10 billion in 1960 to about $1.1 trillion in 2017.
Descriptive Statistics of Japan
Descriptive statistics (Table 2) explores trends in Japan’s inflation, FDI, and GDP. These statistics shows that Japan has inflation mean of 3.16% (SD = 4.19%), FDI mean of $4.04 billion (SD = $7.72 billion) and GDP mean of $2.7 trillion (SD = $2.1trillion)
Figure 3 below depicts trends of inflation, FDI, and GDP in Japan. Since 1960, inflation rates have declined gradually from 3.5% to the current rate of about 1.3%. FDI increased from $1.6 billion in 1960 to $18billion in 2017. GDP has increased from $44.3 billion in 1960 to $4.87 trillion in 2017.
Descriptive Statistics of the World
Table 3 indicates descriptive statistics of inflation, FDI, and GDP across the world from 1960 to 2017. The inflation mean of 7.12% (SD = 3.26%), FDI mean of $640 billion (SD = $876.63 billion), GDP mean of $27.02 trillion (SD = $25.29 trillion).
Inferential Statistics
Correlation Analyses
Correlation analysis (Table 4) shows that inflation has a moderate negative relationship with GDP in Mexico that is statistically significant (r = -0.304, p = 0.020). In contrast, FDI has a statistically significant and very strong positive relationship with GDP in Mexico (r = 0.946, p = 0.000).
Table 5 indicates that inflation has a strong negative association with GDP in Japan, which is statistically significant (r = 0.703, p = 0.000). Contrastingly, FDI has a moderate positive correlation with GDP in Japan that is statistically significant (r = 0.512, p = 0.000).
Correlation analysis (Table 6) depicts that inflation has a strong negative relationship that is statistically significant with the GDP of the world (r = 0.707, p = 0.000). In contrast, FDI has a very strong positive relationship with GDP, which is statistically significant (r = 0.925, p = 0.000).
Regression Analyses
Regression analysis (Table 7) shows that Inflation and FDI have a very strong positive relationship with GDP (R = 0.946). Inflation and FDI account for 89.5% of the variation in GDP in Mexico (R2 = 0.895).
The regression model (Table 8) is statistically significant in predicting the influence of inflation and FDI on GDP in Mexico, F(2,5) = 235.3, p = 0.000.
Coefficients’ table (Table 9) indicates that inflation is a statistically insignificant predictor of GDP (β = $78.48 million, p = 0.909), whereas FDI is a statistically significant predictor of GDP (β = $31.898, p = 0.000). This prediction means that a unit increase in inflation causes GDP to increase by 78.48 million, while a unit increase in FDI makes GDP to increase by $31.898 in Mexico. The regression equation of the model is that: GDP = $78.48 million (Inflation) + $31.898 (FDI) + $101.88 trillion
Table 10 shows that Japan’s inflation and FDI have a strong positive relationship with GDP (R = 0.759). Inflation and FDI collectively explain 57.5% of the variation in GDP in Japan (R2 = 0.575).
The regression model (Table 9) is statistically significant in predicting the effect of inflation and FDI on GDP in Japan, F(2,5) = 37.2, p = 0.000.
Regression coefficients (Table 12) shows that both inflation (β = $301.177 trillion, p = 0.000) and FDI (β = $83.1, p = 0.002) are statistically significant predictors of GDP in Japan. The coefficients mean that an increase in inflation by a unit results in the increase of GDP by $301.177 trillion, whereas a unit increase in FDI causes GDP to increase by $83.1. Therefore, the regression equation is:
GDP = $301.177 trillion (Inflation) + $83.1(FDI) + $3.323 trillion
Regression analysis of the global data (Table 13) shows that inflation and FDI have a very strong positive association (R = 0.932). Inflation and FDI explain 86.8% of the variation in the GDP of the world (R2 = 0.868).
The regression model (Table 14) is statistically significant in predicting the influence inflation and FDI on global GDP, F(2,5) = 181.5, p = 0.000.
Regression coefficients (Table 15) depicts that inflation (β = $1.22 trillion, p = 0.000) and FDI (β = $23.647, p = 0.021) are statistically significant predictors of GDP across the world. Essentially, GDP increases by 1.22 trillion when the inflation rate increases by a percent, while GDP rises by $23.647 when FDI increases by a unit. Thus, the regression equation of the model is:
GDP = $1.22 trillion (Inflation) + $23.647 (FDI) + $20.528 trillion
Findings and Conclusion
Descriptive statistics indicate that Mexico has the highest inflation rate (M = 19.81), followed by the world (M = 7.12%) and Japan (M = 3.16%). Mexico have attracted more FDI (M = $10.39 billion) than Japan (M = $4.04 billion). However, as Japan is a developed economy, it has generated more GPD (M = $2.7 trillion) than Mexico (M = $34.76 billion). Correlation analysis reveals that while GDP has a negative relationship with inflation, it has a positive relationship with GDP. These findings are in line with the study performed in Nigeria, a developing country (Anidiobu, Okolie & Oleka 2018). Comparatively, the relationship between inflation and GDP is stronger in Japan than in Mexico, whereas the relationship between FDI and GDP is stronger in Mexico than in Japan. Developed countries are less attractive to FDI than developing countries because they have sufficient resources to drive their economies (Pandya & Sisombat 2017; Rahman 2014). The relationship between inflation and GDP in Mexico is weaker than that of the world, while the relationship between FDI and GDP of Japan is moderately lower when compared to that of the world.
Regression analysis provided important information regarding the conceptual framework showing the influence of inflation and FDI on the GDP of Mexico, Japan, and the world. In Mexico, although inflation and FDI account for 89.5% of the variation in GDP, only FDI is a statistically significant predictor. Comparatively, the regression analysis of Japan shows that inflation and FDI explain 57.5% of the variation in GDP. Ali and Hussain (2017) found out that inflation has a positive impact on economic growth in Pakistan. Therefore, these findings show that the economic growth of Mexico is more sensitive to the changes in inflation and FDI than that of Japan. On the global scale, inflation and FDI account for 86.8% of the variation in GDP.
The findings of the study demonstrate that inflation and FDI have a statistically significant influence on GDP. Comparative analysis of Mexico, Japan, and the world shows that the influence of inflation and FDI on GDP varies from one country to another, depending on macro- and micro-economic factors. These findings are important to multinational enterprises for it would enable them to establish in developed and developing countries. Given that inflation and FDI influence the establishment of multinational enterprises, understanding of macro- and micro-economic factors is necessary.
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