The present document analyzes the importance of the financial development on economic growth, in transferring the technological diffusion embroiled in foreign direct investment (FDI) inflow on the Ecuadorian economy from 1977 to 2010.

1. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Foreign Direct Investment, Financial Development
and Growth: The case of Ecuador
Mario Alvaracn Paula
School of Graduate Studies
Universidad Carlos Tercero de Madrid
September, 2014
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

2. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Outline
1 Introduction
The causal relationship between Financial Development and Economic Growth
Why is this study important?
2 Literature Review
Financial Development and Growth
FDI, Financial Development and Growth
3 Theoretical Framework: (Hermes Lensink, 2003
Growth Model with Technological Change
4 Data and Context
Selection of Variables and De

3. nition
Putting in Context
5 Methodology
Bound Test Approach
Estimated Model
6 Results
Stationarity Test
Estimation Output
7 Conclusions
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

4. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
The causal relationship between Financial Development and Economic Why is this study important?
The causal relationship between Financial Development
and Economic Growth
Schumpeter (1911): Well-functioning Banks are able to
identify entrepreneurs that allow funds to be channeled to the
most promising investment projects. Eciency
Robinson (1952): Economic Growth creates demand for

5. nancial services, thereby existence of

6. nancial development.
Levine et al. (2000): Exogenous components of

7. nancial
intermediary development are positively associated with
Economic Growth.
FinancialDevelopment = EconomicGrowth.
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

8. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
The causal relationship between Financial Development and Economic Why is this study important?
Why is this study important?
Neoclasical growth model states that developing countries will
experience rapid convergence with developed countries, once
they have access to state of the art technologies. But,
developing countries cant assume the cost, so FDI is
important.
Explore the long run relationship between FDI and economic
growth, watching if the development of

9. nancial sector helps
to capture the absorptive capacity to FDI in
ows toward real
output expansions.
This study aims to observe if

10. nancial sector development act
as an ecient mechanism when transferring the bene

11. ts
embroiled in FDI in
ows to enhance economic growth.
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

12. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Financial Development and Growth
FDI, Financial Development and Growth
Financial Development and Growth
Nexus established in Levine (1997), role of

13. nancial system
Acemoglu and Zilibotti (1997): Financial development
pretends to make markets become less incomplete; capital
accumulation is associated with an increase in the volume of

14. nancial intermediation and services
Rioja and Valev (2003): Relationship may vary according to
the level of

15. nancial development.
Russeau and Wachtel (2011): Countries that has experienced

16. nancial crisis episodes may not have a clear

17. nance-growth
relationship.
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

18. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Financial Development and Growth
FDI, Financial Development and Growth
FDI, Financial Development and Growth
Hermes and Lensink (2003): The development of the

19. nancial
system of the recipient country is an important precondition
for FDI to have a positive impact on economic growth.
Ecient allocation of resources.
Alfaro et al. (2004): The level of development of local

20. nancial markets is crucial to canalize the positive eects of
FDI. The link between FDI and growth is causal, where FDI
promotes growth through

21. nancial markets.
Many authors conclude that well developed

22. nancial markets
promote higher economic growth by absorbing the bene

23. ts
embodied in the foreign capital
ows, especially FDI
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

24. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Growth Model with Technological Change
The Model
Constant rate of return
Where represents the cost in research and development, L is
the labor supply, A indicates the level of technology,
measures capitals share of income or the proportion of
capital income.
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

25. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Growth Model with Technological Change
The Model
FDI is introduced in the model by assuming that there are

26. xed maintenance costs, equal to 1, and

27. xed set up costs in
.
The cost of (research and development) depends on FDI,
explicitly the higher FDI in
ow leads to a decline in the
innovation costs.
Innovation cost function
= f (F)
Where F = FDI , and /F 0
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

28. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Growth Model with Technological Change
The Model
The level of technology (A) is a function of the development
of the

29. nancial sector
(H), A = h(H), where A=H 0.
Constant rate of return
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

30. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Growth Model with Technological Change
The Model
Households maximize a standard inter-temporal utility
function, subject to the budget constraint. This gives the
well-known Euler condition for the consumption growth rate
gC = (1=)(r ),
where is the elasticity of marginal utility and is the
discount rate.
Outputs growth rate
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

31. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Selection of Variables and De

32. nition
Putting in Context
Variables
Dependent Variable
Real GDP growth rate per capita
Independent Variable
Labor force (LF)
Capital stock (CAP)
Foreign direct investment to GDP ratio (net out
ows of
investment from the reporting economy to the rest of the
world and is divided by GDP, FDI)
Domestic gross investment to GDP ratio (gross

33. xed capital
formation to real GDP, INV)
Interaction term between the Foreign Direct Investment and

34. nancial development indicators listed below.
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

35. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Selection of Variables and De

36. nition
Putting in Context
Variables
Financial Development Indicators
DEPHT: liquid liabilities of the

37. nancial system, known as M2
divided by GDP
BANK: commercial and central bank assets (assets of deposit
money banks divided by assets of deposit money banks plus
central bank assets)
PRIVATE: private credit (credit by deposit money banks and
other

38. nancial institutions to the private sector divided by
GDP)
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

39. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Selection of Variables and De

40. nition
Putting in Context
Financial Development and FDI evolution
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

41. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Selection of Variables and De

42. nition
Putting in Context
GDPpc annual growth rate
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

43. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Bound Test Approach
Estimated Model
Bound Test Approach
Works on a limited simple size
Use ARDL model for the estimation of long-run relationship
Robust asymptotic on short and long-run parameters can be
made under least squares estimates of an ARDL model
The asymptotic distribution of the F-statistc is non-standard
under the null hypothesis of no cointegration relationship
between the examined variables
ARDL model has the advantage of not requiring a precise
identi

44. cation of the order of the underlying data
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

45. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Bound Test Approach
Estimated Model
Relationship between economic growth and its
determinants without investment variable (INV)
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

46. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Bound Test Approach
Estimated Model
Relationship between economic growth and its
determinants including investment variable (INV)
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

47. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Bound Test Approach
Estimated Model
Long-run relationship test
Without INV
H0 :

48. 1 =

49. 1 = ::: =

50. 6 = 0
With INV
H0 :

51. 1 =

52. 1 = ::: =

53. 7 = 0
Fupper bound value; the null hypothesis of no long run
relationship is rejected and concludes that there exists
steady-state equilibrium between these variables
Flower bound value; the null hypothesis is not rejected
lower bound value F upper bound value; the result is
inconclusive Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

54. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Stationarity Test
Estimation Output
Results of the Unit Root Test
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

55. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Stationarity Test
Estimation Output
Estimated model using BANK as

56. nancial development
indicator
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

57. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Stationarity Test
Estimation Output
Cointegration Analysis
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

58. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Stationarity Test
Estimation Output
Estimated model using BANK and incliding INV
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

59. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Stationarity Test
Estimation Output
Cointegration Analysis including INV
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador

60. Introduction
Literature Review
Theoretical Framework: (Hermes Lensink, 2003
Data and Context
Methodology
Results
Conclusions
Main Conclusions
It has been determined the existence of long-run levels
relationship between economic growth and its determinants
The best variable or the completest one is BANK to re
ect
the development of the

61. nancial system
Including the variable INV changes substantially the eects,
principally of FDI on economic growth, as the inclusion of INV
represents a situation in which a variable aects growth via an
eciency channel
Financial crisis could aect the relationship between FDI,
Financial Development and Growth
Mario Alvaracn Paula FDI, Financial Development and Growth in Ecuador