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com/abstract=1988644 Electronic copy available at: http://ssrn.com/abstract=1988644 Electronic copy available at: http://ssrn.com/abstract=1988644 Electronic copy available at: http://ssrn.com/abstract=1988644 Electronic copy available at: http://ssrn.com/abstract=1988644 Electronic copy available at: http://ssrn.com/abstract=1988644

Modeling Effects of Foreign direct Investment
on Macroeconomic Variables in Sudan
Professor Dr. Issam A.W. Mohamed and Magdy Alamin
Over the past two decades, many countries around the world have experienced substantial
growth in their economies, driven by inflow of the foreign capital especially in the form of
foreign direct investment (FDI). The share of net FDI in world GDP has grown five-fold
through recent years, making the impact and consequences of FDI on economic growth a
subject of ever-growing interest. This paper attempts to make a contribution in this context,
by analyzing the existence and nature of impact of foreign direct investment on economic
growth, if any, in Sudan during the period (1982-2007), also to investigate how to attract the
required flow of FDI that is enough to fill saving-investment gap to sustain economic growth.
With the hypothesis that sustained efforts to promote political and macroeconomic stability
and implement essential structural reforms, and the policies of aligning some emerging
markets has encouraged the inflow of FDI to Sudan in different sectors.
The important findings are that FDI helps to promote economic growth in the Sudan, i.e.
there is clear evidence of a one-way causality from FDI to economic growth for the whole
period, in the sense that FDI have a significant positive effect on the GDP Growth, for it
promotes exports and so balance of payments, provision of job opportunities and enhancing
the quality of labor and production. However, the study finds that it is difficult to construct
accurate and comparable measures of FDI data by sector for the Sudan as in most developing
countries over several decades. Moreover, the tendency of major sources to present FDI data
in broad aggregates limits the study of the effects or impacts. So the main recommendations
are that: the investment climate in the country must be improved through appropriate
measures to keep pace with global economics developments, Government needed to establish
a proper investment map serving the objectives of economic growth and developments
consists of all data that may needed by foreign investors, supported by the necessary
infrastructures. Government must develop and improve the periodic statistics concerning
investment, foreign capital flows and sources of capital. Future researches in this area should
analyze the causal link in a multivariate VAR analysis to account for other vital determinants
of FDI and GDP growth. This is likely to improve our results and may provide more
conclusions.


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28
Modeling Effects of Foreign direct Investment
on Macroeconomic Variables in Sudan

Professor Dr. Issam A.W. Mohamed
1
and Magdy Alamin

1. Abstract........................................................................................................................... 28
2. Introduction..................................................................................................................... 29
3. Regression Variables....................................................................................................... 29
4. Trade Variables............................................................................................................... 30
5. Inflation Rate .................................................................................................................. 31
6. Empirical Methodology................................................................................................... 31
7. Testing for Cointegration................................................................................................. 32
8. Time Series, Economic Growth Rate and FDI in Sudan................................................... 34
9. Unit Root Test................................................................................................................. 35
10. Cointegration test .......................................................................................................... 36
11. Granger Causality Test .................................................................................................. 36
12. Conclusions................................................................................................................... 38
13. References..................................................................................................................... 38
1. Abstract
Over the past two decades, many countries around the world have experienced substantial
growth in their economies, driven by inflow of the foreign capital especially in the form of
foreign direct investment (FDI). The share of net FDI in world GDP has grown five-fold
through recent years, making the impact and consequences of FDI on economic growth a
subject of ever-growing interest. This paper attempts to make a contribution in this context,
by analyzing the existence and nature of impact of foreign direct investment on economic
growth, if any, in Sudan during the period (1982-2007), also to investigate how to attract the
required flow of FDI that is enough to fill saving-investment gap to sustain economic growth.
With the hypothesis that sustained efforts to promote political and macroeconomic stability
and implement essential structural reforms, and the policies of aligning some emerging
markets has encouraged the inflow of FDI to Sudan in different sectors.
The important findings are that FDI helps to promote economic growth in the Sudan, i.e.
there is clear evidence of a one-way causality from FDI to economic growth for the whole
period, in the sense that FDI have a significant positive effect on the GDP Growth, for it

1
Professor of Economics, Alneelain University, Khartoum-Sudan. P.O. Box 12910-11111.
issamawmohamed@hotmail.com
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29
promotes exports and so balance of payments, provision of job opportunities and enhancing
the quality of labor and production. However, the study finds that it is difficult to construct
accurate and comparable measures of FDI data by sector for the Sudan as in most developing
countries over several decades. Moreover, the tendency of major sources to present FDI data
in broad aggregates limits the study of the effects or impacts. So the main recommendations
are that: the investment climate in the country must be improved through appropriate
measures to keep pace with global economics developments, the government needed to
establish a proper investment map serving the objectives of economic growth and
developments consists of all data that is required by foreign investors supported by the
necessary infrastructures. Government must develop and improve the periodic statistics
concerning investment, foreign capital flows and sources of capital. Future researches in this
area should analyze the causal link in a multivariate VAR analysis to account for other vital
determinants of FDI and GDP growth. This is likely to improve our results and may provide
more conclusions.

2. Introduction
Most developing countries creating a suitable climate to attract foreign direct investment
based on the assumption that foreign direct investment contributes directly to improving the
economic situation in the receiving or host countries. It is obvious for our review of the flow
of direct investment to the Sudan in previous chapter of this research that there is a
considerable leap achieved in attracting foreign investment reflected in the performance of
the economic situation. Through this we are trying to identify the impact of the flow of
foreign direct investment on the economic growth in the Sudan, specifically trying to identify
the role of foreign direct investment in technology transfer, employment, improve the balance
of payments and other indicators of economic performance. That is rather than specifying a
few particular explanatory variables to describe the impact of the FDI on economic growth in
Sudan, which means making ad hoc assumptions about their behavioral link to each other and
to economic growth, the study will estimate unrestricted model incorporating major types of
policy and non-policy variables suggested by the economic theory as important to economic
growth. Then we eliminate the least significant variables to reach the appropriate
specification i.e., to allow the data to select the most appropriate model structure.
The model will include the following types of variables: monetary, trade, fiscal and
exogenous factors. The model will contain variables which are routinely used in growth
regression, in particular, investment (capital formation) and human capital (population). The
sources of data are the IMF, World Bank, Sudans Ministry of Finance and the Central Bank
of Sudan. We will describe different policy and non-policy variable proxies that we will use
in the regression. The selection for these various proxies is guided by previous finding of
empirical work on growth theory as well as the theoretical advances in this field.
3. Regression Variables
Those are the GDP growth rate as a dependent variable of the regression. The data on the per
capita GDP is not complete in some years. Then Gross Capital formation and investment as
one of the few variables that survived as robust and significantly related to economic growth
in thousand of regressions (Levine and Renelt, 1992). While investment-growth relationship
was central to most growth theories, different studies emphasize the importance of different
types of investment. In particular, private investment was shown to be more productive than
public investment (Khan 1996)
2
. However, it is reasonable to assume that an expansion in the

2
Mathieson, A. The Implications of International Capital Flows for Macroeconomic and Financial Policies:
Introduction. International Journal of Finance and Economics, July 1996.
30
level of public goods of physical infrastructure; e.g., transport and communication will be
associated with greater economic efficiency. Studies that emphasis productive public
expenditure, such as health and education included Diamond (1989), Otani and Villanuenva
(1990) and Barro (1991). Those that focus on fixed investment are Diamond (1989),
Orsmond (1990) and Barro (1991). In this paper we will use the Gross Capital formation
(GPF) as a proxy for investment levels. However, the interpretation of the GPF as a variable
influencing growth performance could be problematic. On the one hand, it is highly
associated with trade and institutional variables. In the case of Sudan, country with weak
government institutions, these factors are expected to discourage investment. The argument
for institution affecting investment and economic growth is controversial, e.g., Russia and
China are countries with high growth and non-market oriented institutions.
The encouragement of FDI remains at the forefront of policy outcomes for both developed
and developing countries largely because of the economic benefits perceived from this form
of investment. It has been extensively argued that government policy should be directed to
the removal of capital barriers and other regulatory restrictions that may impede FDI to
ensure that benefits to economic growth are maximized. In particular in the recent empirical
literature, greater attention has been paid to the legal and institutional as well as economic
settings that may facilitate FDI in promoting growth outcomes. So the study provides a new
insight into these issues in Sudan by investigating the impact of FDI using a wide assortment
of variables, which reveal some important findings. For example, the Sudanese government
has taken several measures to create an investment climate through conducting several
amendments to the investment acts and other laws in order to create conducive legal and legel
environment for investment, including a number of financial incentives and inducements.
Although the laws concerning investment, especially to attract foreign capital is more
distinctive laws in the area, but there is some weaknesses related to public culture concerning
the implementation of these law, some are related to the fluctuations in the political system
led to the continuous change in the economic policy of investment. Some are related to the
lack of the investment map which shows the activities that need to invest in.
The Sudanese government established the Ministry for investment in the year 2002, then the
ministry has adopted a unified force in the granting of licenses for investment projects, a step
that has worked to simplify the procedures required to obtain certification for investment
projects, but still less than the required level. The government has adopted various means to
promote the opportunities available for investment included those means holding conferences
and forums for businessmen and embassies to provide information on investment
opportunities available. It has also taken serious steps to establish security and political
stability, through the signing of the Comprehensive Peace Agreement. On the other hand, the
correlation between investment and growth does not mean causation (King and Levine,
1994;
3
Kenny and Williams, 2001)
4
and it might be the case that both investment and growth
are caused by a third factor (e.g., favorable terms of trade). Nevertheless, in this study we will
assume that high levels of investment will bring about high levels of growth since the study is
not purely a test for the growth behavior but rather economic growth is taken as a policy
performance indicator.
4. Trade Variables
Trade is one of the few variables that show robust relation with growth in most of the
empirical work and when the trade variables were not robust it was suggested that the
importance of trade probably work through investment (rather than through resource

3
RG King, R Levine: Capital Fundamentalism, and Economic Development, and Economic Growth- Carnegie
Rochester Conference Series on public policy, 1994.
4
C Kenney, D Williams, What do we Know about Economic growth. World Development, volume 29, 1, 2001.
31
allocation). Knight, Loayza and Villanueva (1993) assumed that trade influences growth and
technical progress in two ways: through technological transfers, and through foreign
exchange, which enables countries to purchase technologically superior capital goods. They
found that trade openness, has significantly positive impact on growth.
The study uses the sum of the exports and the imports as percentage of GDP =
(X+M)/GDP)% as a proxy for the trade policy measuring the degree of openness in the
economy. This will capture both imports and exports policies. On the export side,
government has repeatedly switched between self-sufficiency policies and export growth
promoting policies. On the import side, the government followed extreme policies as such as
total banning for imports. Attention should be drawn to the large gap between imports and
exports making the former five times as large as the later in some years. Consequently, the
selected proxy (X+M)/GDP) could be dominated by the imports behavior. However, this is
mainly attributed to the government policies distortion. More dynamic variables such as
export growth could be used as a proxy of government trade policy. However, the variable
does not reflect the government policy in the 1970s and 1980s which was, basically,
concerned about imports controlling than about exports promoting.
5. Inflation Rate
Although it is agreed between economists that countries with high inflation rates should
adopt policies that lower inflation in order to promote growth, the inability to find simple
cross-country regressions supporting this contention is, according to Levine and Zervos
(1993)
5
, both surprising and troubling. However, the evidence suggests that mild inflation,
up to 5 percent to 8 percent, is positively beneficial to inflation. After that, the effects of high
inflation can be seriously damaging (Thirlwall, 1999)
6
. Unfortunately, the average annual
inflation in Sudan has never been less than 15 percent since 1973. The lowest rate was 12
percent in the year 2000. Consequently, we would expect negative relation between inflation
and economic growth in Sudan. Inflation can be perceived as an indicator for how much the
government has resorted to taxing domestic financial assets through money creation
(sometimes it is called inflation tax policy). Inflation could also be perceived as an indicator
of macroeconomic instability. In both cases, De Gregorio (1992, 1993a)
7
finds evidence of a
negative relation between inflation and growth. However, Bruno and Easterly (1995)
8
were
unable to find a long run relationship between inflation and growth.
6. Empirical Methodology
The econometric strategy of the study starts with simple time series analysis for the FDI
impact on economic growth in Sudan. This examines the stability of the long run growth in
Sudan. If for example, the growth is found to fluctuate around a constant mean this could
imply that either the inflow of the FDI has failed to produce large changes in the economic
growth or the persistent movement in these variables is offsetting. A formal test by DF and
ADF will follow test for co-integration under different assumptions will be conducted.
The study uses quantitative techniques consisting of both econometrics model and statistical
methods. The approach of Granger causality, and simple regression will follow to test
relation and correlation between FDI and economic growth. The individual time series should
be non-stationary for inclusion in the Granger and simple regression analysis.

5
Levine, R. and Zervos, S. Inflation and Growth, in search of stable relationship. American Economic
Association, 1993.
6
Anthony P. Thirlwall; Inflation and Savings Ratio Across Countries; Journal of Development Studies,
University of Kent at Canterbury Princeton University, USA, 1999.
7
De Gregorio, Jose, 1992. "The effects of inflation on economic growth: Lessons from Latin America,"
European Economic Review, Elsevier, vol. 36(2-3), pages 417-425.
8
M Bruno, W Easterly; Inflation and Growth Federal Reserve of ST. Louis, 1995.
32
Cointegration procedure requires time series in the system to be non-stationary in their level.
Similarly, it is imperative that all time series in the co integrating equation have the same
order of integration. Consequently, the study first ascertained the time series properties of all
the variables. The study uses the Augmented Dickey Fuller (ADF) test (Dickey and Fuller
1981)9 to test for unit roots. In order to model the variable in a manner that captures the
inherent characteristics of its time-series. As such, a unit-root test is often necessary before
empirical studies. Based on the result by Dickey and Fuller(1979)10. The simple form of the
DF test could be expressed as:
(1)
1 t t t
y y + = A


DF test equation with a constant:
(2)
1 t t t
y y + + = A


DF test equation with a constant and trend:
(3)
1 t t t t
y trend y + + + = A


Where;
t

the variable under study

t

random variable,
) , 0 ( ~
2

t
The null
hypothesis is that 0 = and alternative hypothesis 1 < .
The Augmented Dickey and Fuller(ADF) test that we use in the study is as shown below:

y
t =
+
t
+(-1) y
t-1
+
i
y
t-1
+ t
where = 1- L y
t
is a macroeconomic variable such as GDP or export; t is a trend variable; a
t

is a white noise term. The null hypothesis is H
0
=1 and yt is said to possess the unit root
property if one fails to reject H
0
.
7. Testing for Cointegration
Given a group of non-stationary series, we may be interested in determining whether the
series are cointegrated, and if they are, in identifying the cointegrating (long-run equilibrium)
relationships. EViews implements VAR-based cointegration tests using the methodology
developed by Johansen (1991, 1995). Johansens method is to test the restrictions imposed by
cointegration on the unrestricted VAR involving the series.
Johansens Cointegration Test is applied as follows,
Consider a VAR of order p:
t t p t p t t
Bx y A y A y c + + + + =


1 1

Where yt is a k-vector of non-stationary I (1) variables, xt is a d vector of deterministic
variables, and t is a vector of innovations. We can rewrite the VAR as:

=

c + + I + H = A
1
1
1
p
i
t t i t i t t
Bx y y y

Where
= I = H
= + =
p
i
p
i j
j i i
A I A
1 1
;

Grangers representation theorem asserts that if the coefficient matrix has reduced rank r<k,
then there exist kr matrices and each with rank r such that =/ and /yt is stationary. r
is the number of cointegrating relations (the cointegrating rank) and each column of is the
cointegrating vector. The elements of are known as the adjustment parameters in the vector

9
Dickey, D. and W. Fuller (1981) Testing for a Unit Root Time Series Regression. Journal of American
Statistical Association, Vol. 79, No. 386, pp. 355-367.
10
Dickey, D. A. and W. A. Fuller (1979), Distribution of the Estimators for Autoregressive Time Series with a
Unit Root, Journal of American Statistical Association, 74, 427-31.
33
error correction model. Johansens method is to estimate the matrix in an unrestricted form,
then test whether we can reject the restrictions implied by the reduced rank of . Johansen
proposes two different likelihood ratio tests of the significance of these canonical correlations
and thereby the reduced rank of the matrix: the trace test and maximum eigenvalue test,
shown respectively.
) 1 ln(
^
1
i
n
r i
trace
T J

+ =
=

) 1 ln(
^
1 max +
=
r
T J

Here T is the sample size and
^
i

is the ith is the largest canonical correlation. The trace test

tests the null hypothesis of r cointegrating vectors against the alternative hypothesis of n
cointegrating vectors. The maximum eigenvalue test, on the other hand, tests the null
hypothesis of r cointegrating vectors against the alternative hypothesis of r + 1 cointegrating
vectors. Neither of these test statistics follows a chi square distribution in general; asymptotic
critical values can be found in Johansen and Juselius (1990) and are also given by most
econometric software packages. Since the critical values used for the maximum eigenvalue
and trace test statistics are based on a pure unit-root assumption, they will no longer be
correct when the variables in the system are near-unit-root processes. Thus, the real question
is how sensitive Johansens procedures are to deviations from the pure-unit root assumption.
The Granger causality test is used in time series analysis to examine the direction of causality
between two economic series has been one of the main subjects of many econometrics studies
for the past three decades. Recent studies have shown that the conventional F-test for
determining joint significance of regression-derived parameters, used as a test of causality, is
not valid if the variables are non-stationary and the test statistic does not have a standard
distribution (Frimpong, 2007)
11
.
Generally, causality between two economic variables has been tested using Granger and Sims
causality test (see Granger 1969 and Sims 1972). Within a bivariate context, the Granger-type
test states that if a variable x Granger causes variable y, the mean square error (MSE) of a
forecast of y based on the past values of both variables is lower than that of a forecast that
uses only past values of y. This Granger test is implemented by running the following
regression:
y
t =
+
t
y
t-1
+ y
t
x
t-1
+
t

and testing the joint hypothesis H
0
: y
1
= y
2
= y
p = 0
against H
1
: y
1
y
2
y
p

0
Granger
causality from the y variable to the coincident variable x is established if the null hypothesis
of the asymptotic chi-square (x) test is rejected. A significant test statistic indicates that the x
variable has predictive value for forecasting movements in y over and above the information
contained in the latters past. Following the criticisms in recent studies (Kholdy, 1995)
12
of
the traditional assumption of a one-way causal link from FDI to growth, new studies have
also considered the possibility of a two-way (bi-directional) or non-existent causality among
variables of interest. In other words, not only FDI can Granger cause GDP growth (with
either positive or negative impacts), but GDP growth can also affect the inflow of FDI or
there could be no causal link. From the numerous existing studies, the causal link between
FDI and economic growth as an empirical question seems to be dependent upon the set of
conditions in the specific host country economy. Chowdhury and Mavrotas (2005)
13
have
suggested that individual country studies be done to examine the causal links between FDI

11
Frimpong et al., Bivariate causality analysis between FDI inflows and economic growth in Ghana, Munich
Personal RePEc Archive Paper No. 351. 2007.
12
Kholdy (1995) Causality Between Foreign Investment and Spillover Efficiency. Applied Economics.
13
Chowdhury, A. and Mavrotas, G. (2005): FDI and Growth: A Causal Relationship, UNU-WIDER Research
Paper No. 2005/25, UNU-WIDER.
34
and economic growth since it is country specific. The relation between two variables, or the
simple regression is used for testing hypotheses about the relation between a dependent
variable Y and explanatory variable X. and for prediction. The regression takes the form:
X
t 1 0 t t
y
+
+ =
(8)
where

The error term with zero mean and constant variance.

To look for direct effect of FDI on economic growth we estimate the following equation:
GROWTH
i
=
0
+
1
INITIAL GDP
i
+
2
FDI
i
+
3
CONTROLS
i
+ v
i

CONTROL variables may include inflation, trade volume, population growth, institutional
quality or government consumption.
8. Time Series, Economic Growth Rate and FDI in Sudan
The study will start the analysis with some basic descriptive statistics and graphic
presentation. This will include looking at the mean, and the standard error, shift in the mean,
and simple normality test. Then, we use formal test to check whether the process can be
described as a random walk or not by employing formal tests as DF, ADF and spectrum
analysis. The following shows that the mean values of the growth rate in Sudan fluctuated
from 1.7% during 1982-1989 to 7.3% during 1999-2007. The mean value was about 4.9
percent for the whole period 1982-2007, which is biased by low growth rate in eighties. The
mean low rates during the execution of the SAPS in 1980,s recording a figure of 1.7 percent
compared to 7.3 during the oil era. For example there is a huge increase during the last four
years (2004-2007), which are 9.1%, 8.3%, 9.3% and 10.2% respectively. They are considered
among highest rates in the world. When we look at the standard deviations the deviations in
the 1980s indicate large level of instability in economic growth process for that period.
Statistics of GDP Growth and FDI in Sudan (1960-2007)
GDP growth FDI Period
Simple Mean St. Dv. Mean St. Dv.
Economic Era
1982-1989 1.7 7.4 91.7 77.5 SAPS
1990-1998
5.6 1.9 116.8 214.7
Economic strategy
1999-2007 7.3 1.4 1325.3 1127.3 Oil Era
1982-2007 4.9 4.8 498.5 851.7 Whole Period
Figure (1) GDP Growth rate
Figure (1) shows the GDP
growth rate for the period
1982-2007. From this figure, it
is clear that the growth process
in Sudan has been fluctuating
all the time with increasing
attitude. To sum up, the above
results show that the objective
of raising the GDP growth has
not been achieved despite the
introduction of the SAPS in
1980/1981. Moreover, the
levels of the standard
deviations in 1980s and the
figure, suggest that the SAPS failed to produce more stability in the economy. When we
compare the SAPS in the 1990s with the SAPS in the 1980s we find high and stable growth
in the former. Unfortunately, the fairly large standard deviations will undermine our ability to
draw strong conclusions about the growth process in Sudan. Consequently, formal tests will
growth
0
2
4
6
8
10
12
14
1982 1985 1988 1991 1994 1997 2000 2003 2006
growt h
35
be provided to check whether or not the growth process in Sudan has been fluctuating around
a constant mean.
FDI is sharply and steadily increased since 1999, due to starting production and exporting oil,
and huge amount of foreign capital in the form of FDI invested in this sector. During the
period 2001- 2004, the foreign direct investment (FDI) inflow to Sudan almost tripled from
$574 million in 2001 to $1.5 billion in 2004, according to 2005 World Investment Report
issued by the United Nations Conference on Trade and Development. Among Arab countries,
Sudan came in third in attracting foreign direct investments. The performance of the
Sudanese economy in attracting investments is truly impressive as the country jumped from
the 62
nd
place in 2000 to the 18
th
in 2004 on the UNCTADs Inward FDI Performance Index.
From figure (2) it is obvious that till the mid 1997 FDI was less than 500 million dollar, but
since 1998 it began to increase with low rate, till the year 2004, from which it began to rise
sharply and steadily. Accordingly, it is seemingly that there is consistency in the trend and
attitude of GDP growth rate and trend of increase in FDI.
9. Unit Root Test
The study uses the Augmented Dickey Fuller (ADF) test (Dickey and Fuller 1981) to test for
unit roots. In order to model the variable in a manner that captures the inherent characteristics
of its time-series. Blough (1992)
14
discusses the trade-off between the size and power of unit
root tests, namely that they must have either a high probability of falsely rejecting the null of
non-stationarity when the DGP is a nearly stationary process, or low power against a
stationary alternative. This is because infinite samples it has been found that some unit root
processes display behavior closer to stationary white noise than to a non-stationary random
walk, while some trend stationary processes behave more like random walks. Thus, as
pointed out by Blough (1992), unit root tests with high power against any stationary
alternative will have a high probability of a false rejection of the unit root when applied to
near stationary processes. These problems, occurring when there is near equivalence of
Nonstationary and stationary processes in finite samples are partly due to using critical values
based on the DF asymptotic distribution, bearing in mind all these potential problems in
testing for unit roots. The following table depicts the unit root test results.
Unit root test
Critical Values*
Order of integration 10% 5% 1% ADF Variables
Gdp ~I(2) -2.67 -2.67 -2.67 -3.14487136 Gdp
FDI ~I(1) -2.67 -2.67 -2.67 -4.45015204 FDI
Export ~I(2) -2.6756 -2.6756 -2.6756 -3.95632658 Export
Import ~I(1) -2.67 -2.67 -2.67 -6.10832785 Import
Inflation ~I(1) -2.67 -2.67 -2.67 -3.37621052 Inflation
M2~I(1) -2.67 -2.67 -2.67 -5.79234125 M2
Openness ~I(2) -2.6756 -2.6756 -2.6756 -2.98443007 Openness
Term of trade ~I(1) -2.67 -2.67 -2.67 -5.36225919 Term or trade
Population ~I(2) -2.6756 -2.6756 -2.6756 -3.49870401 Population
Exchange ~I(2) -2.6756 -2.6756 -2.6756 -3.69751239 Exchange
Growth ~I(1) -2.67 -2.67 -2.67 -2.85907571 Growth
Capital ~I(1) -2.67 -2.67 -2.67 -7.4319049 Capital
*MacKinnon critical values for rejection of hypothesis of a unit root.

14
Blough, N. Near Observational Equivalence and Theoretical size Problems with Unit Root Tests, Cambridge
University Press, 1992.
36
The computed ADF test-statistics to the all variables is non stationary in the level, but the
variables FDI, Import, Inflation, M2 Terms of Trade, Growth and Capital Formation are
stationary in the first difference. The variables GDP, Exports, Openness, Population and
Exchange Rate are stationary in the second difference. The foreign reserve and oil price are
non stationary in the level but they are in the first difference. These results support the
previous descriptive statistics finding that either economic policy in Sudan has failed to bring
about large changes in the GDP growth rate or what has been happening was offsetting.
10. Cointegration test
We conduct Cointegration tests by employing Engle and Granger (1987)
15
approach as well
as Johansens (1988)
16
approach which allows for Cointegration in a system of equations.
Cointegration test (Growth FDI Exchange GDP Population Export)
Eigen value
Likelihood
Ratio
5%
Critical
Value
1%
Critical
Value
Hypothesized
No. of CE(s)
0.972917 208.3167 94.15 103.18 None **
0.908567 125.3135 68.52 76.07 At most 1 **
0.807706 70.2941 47.21 54.46 At most 2 **
0.553555 32.37333 29.68 35.65 At most 3 *
0.31166 13.82521 15.41 20.04 At most 4
0.203576 5.235349 3.76 6.65 At most 5 *
*(**) denotes rejection of the hypothesis at 5%(1%) significance level.
L.R. test indicates 5 cointegrating equation(s) at 5% significance level. This implies that the
residuals are stationary and hence there is Cointegration between the variables i.e., there is
long run relationship between the variables.
11. Granger Causality Test
The use of Granger causality tests to trace the direction of causality between two economic
variables is not uncommon in empirical work. The direction of causality has generally been
tested using either the Granger or Sims tests (Granger 1969)17. A causality test could provide
insight on whether a single or simultaneous equation model is appropriate for FDI-growth
relationship. The fact is that FDI inflow volume and economic growth are in tandem revealed
nothing about the causal direction. Therefore, the issues of causality between FDI and
economic growth need to be investigated.
These tests are based on null hypotheses formulated as zero restrictions on the coefficients of
the lags of a subset of the variables. However, such tests are grounded in asymptotic theory;
yet, it must be borne in mind that asymptotic theory is only valid for stationary variables, thus
if a series is known to be non-stationary, I(1), then such inferences can only be made if the
VAR is estimated in first differences, and therefore stationary. This causes problems because
the unit root tests to test the null hypothesis of stationarity have low power against the
alternative hypothesis of trend stationarity. Similarly, the tests for cointegrating rank in
Johansens tests are sensitive to the values of trend and constant terms in finite samples and
thus not very reliable for typical time series sample sizes. In other words, it is possible that
incorrect inferences could be made about causality simply due to the sensitivity of
stationarity or Cointegration tests. The study uses the methodology of Pair wise Granger
Causality Tests for causality in the FDI-Growth relationship. Pair wise Granger Causality

15 R. Engel, C. Granger. Cointegration and Error Correction: Representation, Estimation and Testing-
Econometrica. 1987.
16 Soren, J. Role of the Constant and Linear Terms in Cointegration Analysis of Nonstationary Variables, 1994.
17
Granger. Investigating Causal Relations by Econometric Models and Cross-spectral Methods, Econometrica.
Vol. 37, No. 3, 1969.
37
Tests avoid the problems outlined above by ignoring any possible non-stationarity or
Cointegration between series when testing for causality, thereby minimizing the risks
associated with possibly wrongly identifying the orders of integration of the series, or the
presence of Cointegration, and minimizes the distortion of the tests sizes as a result of pre-
testing (Mavrotas and Kelly 2001)
18
.
Granger causality Test
Obs. F-statistic Prob.
FDI does not follow Granger Cause GROWTH23 4.14159 0.03314
GROWTH does follow not Granger Cause FDI 0.41215 0.66832
The Granger-causality (Granger, 1969) between FDI and growth in at least one direction as
one variable can help determine the other. Overall, we find clear evidence of a one-way
causality from FDI to economic growth for the whole period. However there is generally no
evidence of causal from economic growth to foreign direct investment. The fact that Growth-
driven FDI was not identified during the period of the study, which clearly shows that
economic growth is just a necessary, but not a sufficient condition to attract FDI inflows. It is
therefore very important to pay increased attention to the overall role and then quality of
growth as a vital determinant of FDI along with the quality of human capital, infrastructure,
institutions, governance, legal framework, ICT, tax systems, etc., in Sudan, in consequence,
the provision of an enabling environment that captures the above listed parameters would
provide a better incentive to attract FDI inflows than the usual piecemeal approaches such as
petitioning via investment tours, organization of trade-expos and myriad special initiatives
aimed at attracting specific investments into the country. Sudan economy has, however,
begun to show recovery symptoms. Sudan's GDP grew by 6% in 1999 and inflation dropped
sharply to 16% after peaking at 166% in 1996. By 2004 the inflation rate was down to 8.8%.
The GDP real growth rate for 2004 was 5.9%. The growth is attributed to oil, which has
boosted state income since exports began in mid-1999, and to the new program of IMF
reforms started in 1997. Nevertheless, oil exports that now account for about some 70% of
export earnings (77% in the first quarter of 2001), are unlikely to boost the economy
significantly unless the civil war can be ended. GDP growth, driven by developments in the
oil sector, is expected to remain strong in the next few years. Furthermore, there are risks to
entering the international market as control of natural resources is one of the key issues in the
civil war. These findings suggest Sudans capacity to progress on economic growth and
development will depend on its performance in attracting foreign capital. Sudans outward
looking development strategy should include FDI as an essential part in addition to export.
Regression Analysis: Dependent Variable: D LOG (GROWTH)
Variable Coefficient Std. Error t-Statistic Prob.
C -0.951189973 0.764413477 -1.244339617 0.2353
FDI(-1) 0.000233735 9.27965E-05 2.518794254 0.0257
D(LOG(EXPORT)) -1.611224765 0.307325259 -5.242734593 0.0002
LOG(GROWTH(-1)) -0.965044315 0.171140619 -5.638896945 0.0001
LOG(TOT) 0.69634461 0.182240496 3.821020162 0.0021
R-squared 0.819585921 Mean dependent var 0.072406
Adjusted R-squared 0.764073897 S.D. dependent var 0.632487
S.E. of regression 0.307212982 Akaike info criterion 0.707582
Sum squared resid 1.226937616 Schwarz criterion 0.954908
Log likelihood -1.368239672 F-statistic 14.764115
Durbin-Watson stat 1.495721908 Prob(F-statistic) 0.000093

18
A Chowdhury, G Mavrotas FDI and Growth: What Causes What, World Economy, Blackwell Synergy, 2001.
38
Where log growth and log export are the change in the logarithm of growth rate and
export, respectively. FDI(-1) is the lagged foreign direct investment, and log(TOT) is the
logarithm of term of trade. Then according to the results shown in the equation above we find
that the lagged foreign direct investment and term of trade are statistically significant and the
coefficients of these variables are positive. But the first difference of the logarithm of export
and lagged growth are statistically significant and the coefficients of these variables are
negative. The set of explanatory variable explains 81 percent of total variation in the
dependent variable.
The stability of the model











Ramsey RESET Test
F-statistic 3.02363285 Probability 0.0753
Log likelihood ratio 7.60834483 Probability 0.0223

Ramsey Reset test accepts the hypothesis of the absence of model miss-specification, by both
tests.
12. Conclusions
Recent theoretical and empirical advancement on growth accounting and endogenous growth
front has emphasized that FDI can be a catalyzed for development of development countries.
FDI can contribute to the domestic stock of knowledge and its very presence generates a host
of externalities enhancing productivity and competitiveness of the host country. The
increasing importance of international capital flows and especially FDI seems to be another
important component of outward-looking development policies that should not be ignored.
FDI can contribute in growth both direct and indirect ways. First, introduction of new
technology by MNCs has high skill content. This is reflected by new vintages of capital,
quality control and precision in production and accompanying increased training skill up
gradation (World Bank 1997). They brought with them a package of market knowledge and
marketing skill accumulated from their long-standing experience and broader exposure to
world wide competitive markets. The indirect contributions of FDI in enriching the over all
knowledge of the host economy, these include productivity and export spillovers. Thus, the
research examines the effects of FDI in the Sudan economic growth by taking into account
the openness link. In this study, we analysis existence of causality between growth, FDI in
Sudan over the period 1982-2007.We found the long run relation among foreign direct
investment, export and domestic growth.
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CUSUM of Squares 5% Significance
39
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