Working Paper Series: Special Edition of 2016 to 2018 Interns

4.0 Empirical Methodology

4.1 Model Panel vector error correction model (VECM) and panel Granger causality analysis were utilized to investigate the causal link between FDI and trade openness on economic growth in the six independent economies of the ECCU, which is also the model used by Adhikary (2015) . To assess this empirical causal relationship, the general specification of the VECM follows: ∆ = 1 −1 + � ∆ − =1 + � ∆ − + � ∆ − =1 + =1 . 1 = 1, 2, 3 . … . = 1, 2, 3 … . . Where ∆ is the lag operator, −1 is the error correcting term (ECT) used to handle variables that may have deviated from their long-run equilibrium path due to some disturbance over time and is the error term. X is a vector of exogenous variables not defined or explained in the system while G is a vector of endogenous variables. j denotes the j th country in the t th period.

The actual VECM estimated follows: ∆ = 1 −1 + � ∆ − =1 + � ∆ − + � ∆ − =1

+ � ∆ − =1

+� ∆ ℎℎ − =1

=1 +

. 2

Where ~ . . (0, 2 ) ln is the natural logarithm . eg is Gross Domestic Product per capita which used to capture economic growth. fdi is the net inflow of foreign direct investment, it is widely the notion that open economies are more likely to attract relatively more fdi inflows than closed economies. to represents trade openness which is traditionally measured by the sum of exports and imports divided by GDP [(x+m)/gdp]. Trade openness as posited by the literature allows for increase efficiencies (productivity) and technological spill overs. Therefore, net fdi inflows and to are the openness indicators employed in this study. Control variables include government spending noted

97