Research Methods 2
Impact of FDI on performance of local corporations of the GCC countries
Table of Contents
Abstract ......................................................................................................................................................... 1
Introduction .................................................................................................................................................. 1
Research problem ......................................................................................................................................... 2
Research question and research design ....................................................................................................... 2
Data collection method................................................................................................................................. 3
Sample size.................................................................................................................................................... 3
Data analysis ................................................................................................................................................. 4
Data visualization .......................................................................................................................................... 4
Conclusion ..................................................................................................................................................... 4
References .................................................................................................................................................... 4
Abstract
Foreign direct investment (FDI) has always been considered a source of development for the host
country and while many studies explore its impact on economic growth, there are little studies
which have explored the impact on the financial performance of local firms. Therefore, the
proposed study will look into this aspect using an empirical research design for the case of 300
companies drawn from GCC countries. A multiple regression will be run exploring the impact of
FDI and several control variables on financial performance of the company. The write up below
further emphasizes on the tools and techniques that will be used.
Introduction
Inflows of foreign direct investment (FDI) have been regarded as amongst the easiest ways to
close the capital deficiencies in a country. Erdal and Gocer (2015) provided that this especially
holds true for developing economies as not only FDI provides source of capital but also it brings
a source of technological know-how. Muli et al., (2017) further argued that FDI can supplement
the low national savings level and also promote economic growth along with managerial and
capital development. While FDI has positive implications on the economy, Lu, Tao and Zhu
(2017) provided that that FDI is a major policy priority as it helps the local industries as well.
Newman et al., (2015) also stated that multinational firms carry out spillover effects on local
firms and help them to improve performance. Therefore, against this background it will be useful
to see how FDI improved local corporations’ performance for GCC countries. This report will
provide the statement of the problem, research design, restated research question, data collection
and data analysis methods.
Research problem
Developing countries lack viable technological capacity that can help them with the economic
growth. Due to low technology levels, those countries companies cannot experiment with new
and better ways to carry out operations. It is important to consider that FDI is not only a source
of growth for the economy but also it is a source of growth for the pre-existing companies.
Hence, this research will see how FDI relates with the growth of the local companies.
Another issue is that many studies on FDI are related with implications for the economy in terms
of economic growth. There is very limited literature on how FDI results in performance
improvement for local companies. The proposed study will fill in the literature limitations and
also fill in the literature gap for the case of GCC countries for which no study exist exploring this
relationship.
Research question and research design
The proposed study will answer the following research question:
““What is the impact of FDI on the performance of domestic companies from the GCC
countries?”
This question can be converted into the following hypotheses:
H1: Foreign direct investment has a significant impact on the performance of local corporations
in GCC countries
H2: Foreign direct investment has a positive impact on the performance of local corporations in
GCC countries
The above hypotheses follow from the conceptual framework that FDI brings in capital flows,
managerial know-how, advanced technology of production and marketing expertise which
improves the performance of the local companies where performance may be financial
performance or non-financial performance. This conceptual framework is adapted from the study
of Wanjere et al., (2021). However, the emphasis of the performance will be on financial
performance which means an empirical research design will be adopted following quantitative
methodology where performance will be quantified. A multiple regression model will be used
where the impact of FDI on financial performance of local firms will be gauged. The multiple
regression model is proposed as follows:
FPit = β0 + β1FDIit + β2ECit + β3REit + β4BSit + β5FSit + εit
Where, FPit is the financial performance of firm “i” at time period “t”. The proxy for financial
performance will be return on assets (ROA) for the firm. The FDIit is FDI and it will be a
dummy variable assuming a value of 1 if the firm is foreign owned and a value of 0 if its
ownership is domestic owned. In order to control for multicollinearity issues, several control
variables are included that can affect ROA. These are REit which is reinvested earnings, ECit
which is equity capital, BS is size of the board and FS is size of the firm. The variables will be
log transformed. β are the parameter coefficients and ε is the error term.
Data collection method
Data may be collected via primary or secondary means but primary data collection often has
strict ethical rules to be followed which are why secondary data collection method has been
chosen and is also a major reason for choosing the quantitative approach. A cross-sectional data
will be collected which means collection at a single point in time. The source of data collection
will be the annual reports of the companies chosen.
Sample size
A sample of 50 corporations from each of the GCC countries will be chosen making the total
sample of 300 companies. The sample will randomly drawn from financial or non-financial
industrial sector considering that results are available on those companies from secondary data
sources.
Data analysis
Data analysis will include the various tests to be performed for analytical purposes. Firstly, this
will entail the running of diagnostic tests for preliminary analysis. The diagnostic test will be for
the performance of the chosen firms to ensure that they are normally distributed. A histogram
graph will be used to check for the normality. Secondly multicollinearity tests will be performed.
According to Gregorich et al., (2021) it was explained that multiple explanatory variables exhibit
high degree of correlations. Thirdly, homogeneity tests will be performance to see whether the
different values of the predictor variables result in same variances. The purpose of these tests
will be to ensure that the results are robust in nature.
Data visualization
The histogram approach for testing of diagnostics or normal condition for the performance is part
of the data visualization technique. Data visualization tools are easy methods to visually look at
the data and it is more interpretive in nature. Therefore, the data visualization tools will be used
alongside in order to improve the comprehension of results.
Conclusion
The above report has outlined the detailed research methodology to explore the impact of FDI on
financial performance of firms in GCC countries. A multiple regression model is proposed and a
300 sample size is proposed with 50 firms belonging to each GCC country.
References
Erdal, L. and Göçer, İ., 2015. The effects of foreign direct investment on R&D and innovations:
Panel data analysis for developing Asian countries. Procedia-Social and Behavioral
Sciences, 195, pp.749-758.
Gregorich, M., Strohmaier, S., Dunkler, D. and Heinze, G., 2021. Regression with highly
correlated predictors: variable omission is not the solution. International journal of
environmental research and public health, 18(8), p.4259.
Lu, Y., Tao, Z. and Zhu, L., 2017. Identifying FDI spillovers. Journal of International
Economics, 107, pp.75-90.
Muli, W.M., Aduda, J.O., Lishenga, J.L. and Abala, D.O., 2017. The Moderating Effect of
Economic Growth on the Relationship between Economic Integration and Foreign Direct
Investment in the East African Community. Journal of Finance and Investment Analysis, 6(3).
Newman, C., Rand, J., Talbot, T. and Tarp, F., 2015. Technology transfers, foreign investment
and productivity spillovers. European Economic Review, 76, pp.168-187.
Wanjere, M.D., Ogutu, M., Kinoti, M. and Iraki, X.N., 2021. Foreign Direct Investment and
Local Firm’s Performance. European Journal of Business and Management Research, 6(6),
pp.216-222.