Working Paper Series: Special Edition of 2016 to 2018 Interns

developing countries, Shahmoradi and Baghbanyan (2011) concluded that the extent to which an economy is opened would result in a positive effect on FDI inflows into that country. Singh and Kwang (1995) also adapted a panel approach in investigating the determinants of FDI in developing counties and cited a linkage mechanism of multinational firms that may engage in heavy trading activities as they commence operations in a particular country. The author further noted open economies smooth trade paths in and out of the countries such that FDI can flow uninterrupted because of less barriers. Research conducted by Hussin and Saidin (2012) analyzing the three variables’ impact on growth has concluded a positive linkage between FDI and capital formation. In fact, the authors noted that FDI inflows can potentially add to gross fixed capital formation which eventuate into growth in the economy of the host country. The review of the literature has found inconclusive results on the impact of FDI and trade openness on economic growth, thus keeping the doors open for continued dialogue on the subject matter. Although the findings vary in the literature this might be a function of the differing methodologies applied in the research that inadequately controlled for statistical issues. However, the takeaway is that open economies tend to benefit from transfer of knowledge, technology, skills, and increased competition. Moreover, by being open there can be increases in capital whether through FDI or multinational corporations (trade). The reviewed literature shows that carefully and strategically harnessing these three variables is able to result in a more competitive economy in the global arena, which was the case of many Asian and Latin American countries, see Awokuse (2008), Kakar & Khilji (2011) and Adhikary (2015). 3.0 Background and Stylized Facts The ECCU is a group of islands located in the tropical area more generally known as the Caribbean. 18 These islands are in fact relatively young and the oldest independent country is Grenada at 42 years. The ECCU was formed in 1981 through the legal bindings of the Treaty of Basseterre 19 and consists of six Caribbean islands including Antigua and Barbuda, the Common Wealth of Dominica, Grenada, St. Kitts and Nevis, Saint Lucia and St Vincent and the Grenadines. For deeper integration, the Treaty was revised in 2010, establishing the Eastern Caribbean

18 Note that Montserrat joined the ECCU in 1981 while Anguilla joined in 1995. 19 For deeper reading of the claims made in this paragraph, refer to the following articles in the Revised Treaty of Basseterre. Articles 1, 2, 12, 14, 15 and 27.

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