THE IMPACT OF DOMESTIC SAVING AND FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH EMPRICAL STUDY IN CASE OF YEMEN (1990-2012)

Abstract

Purpose- This research essentially aims to investigate the impacts of domestic saving (DS) and foreign direct investment (FDI) on economic growth in the Republic of Yemen since Yemeni reunification in 1990 using data during the period 1990-2013. This research was designed as a quantitative study and descriptive analytical method was followed. Design/methodology/approach-) Secondary data was used to measure the variables to specify the effects of independent variables on the dependent variable. Data was collected from various internal and external resources. The collected data were analyzed by using eviews statistical package version 7 to explain the results of data. The analysis firstly tests unit roots for the DS, FDI and GDP by using Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests. Secondly assesses the equilibrium relationship between GDP and its probable determinants of DS and FDI through applying Johansen and Juselius (1990) tests finally determine the causality direction between the variables employed Granger-causality tests. Findings The study results indicate that there is long run relationship between domestic savings and foreign direct investments with real income growth in Yemen. Foreign direct investment has statistical, significant, and inelastic effect on real income (-0.299) while domestic savings are not statistically significant in the long term coefficients. Error correction model exposes that Yemeni real income converges to its long term equilibrium level reasonably low at -0.01884% by the foreign direct investment and domestic savings contributions; however, this coefficient is statistically significant. Lastly, Granger causality tests illustrate that there is a bidirectional relationship between DS, FDI and economic growth. Savings is driven force but foreign direct investments are output. If savings and income increase, the foreign direct investments were attracted more. Also, this study has confirmed that saving is an income driven in Yemen. Limitation of Study: That there is no accurate information about the previous years before the unity. So that the researcher ignores that information and start from unity country generated. Another limitation, is that focus only on Yemeni economy and the around circumstances with no concentrate on international variables because There is no significant impact on world economy as a result of economic fluctuation in Yemen. Also this research aims to study how to develop investment climate in Yemen as well as attract new FDI to Yemen.