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Trade is the engine of growth, as seen in the development history of the advanced nations in the nineteenth andearly twentieth centuries. Countries benefit from trade thanks to the specialization of production based on their comparativeadvantages and economies of scale. Furthermore, trade is expected to have a positive impact on growth in the long-run in terms ofpositive externalities such as imported technology and increased knowledge base. However, developing countries are currently facingthe problem of declining terms of trade, in which the price of their exports relative to their imports price falls. Trade barriersimposed by the developed countries are pressing issues nowadays.
Theoretically, foreign direct investment (FDI) is believed to enhance economic growth through improvement intechnology, efficiency and productivity. In short, it is a channel through which advanced technology and management practices aretransferred from developed to developing countries.
The impact of ODA or foreign aid though, still remains ambiguous but likely to be positive in good-policycountries where the reform is initiated by local government and supported timely and efficiently by donors. However, a number offactors such as the fungibility of aid, poor institutions and corruption or the likes, may hinder the efficiency of aid. How doesforeign aid affect growth in developing countries and how does this relation vary across regions? These are the issues that the studywill focus on.
Investments in human capital are supposed to be positively related with growth. It is the key input to theresearch sector, which generates the new products or ideas that underlie technological progress. Other things being equal,countries with higher human capital tend to grow faster (Barro, 1991). This implies that the coefficient of SCHOOL isconventionally expected to be positive.
As mentioned earlier, in order to investigate the impact of aid on growth across regions, dummies EASTASIA,SOUTHASIA and SUBSAHARA are used for East Asia, South Asia, Sub-Saharan Africa regions respectively. Additionally, an INLANDdummy for inland countries under study is also included. Then, the slope dummies for these respective regions, i.e ODA*EASTASIA,ODA*SOUTHASIA, ODA*SUBSAHARA and ODA*INLAND are incorporated.
4.2. Estimation techniques
The Ordinary Least Squared (OLS) technique is used to estimate the effects of explanatory variables on the GDPper capita growth. 1
1 The diagnostic tests, such as Breusch-Godfrey, White Correction of Standard Errors, Ramsey RESETand Jarque-Bera tests are conducted to check for the problems of autocorrelation, heteroskedasticity, wrong functional form use andresidual non-normality respectively. A multicollinearity test and F-test for every regression are also conductedcorrespondingly.
4.3. Data description
Initially, I tried to collect data on GDP, gross domestic saving, foreign direct investment, officialdevelopment assistance, secondary school pupils, trade and population for 137 developing countries over the period from 1975to 2000 from World Development Indicators (WDI). Due to the limitation of data, finally a sample of 39 countries wasobtained.
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