The Influence of FDI on Export Performance: The Case of Kyrgyzstan

American University of Central Asia 
 
 
 
 
 
 
 
 
 
 
 
 

  “Influence of Foreign Direct Investments on Export Performance: The Case of Kyrgyzstan” 
 
 
 
 

Student: Ruslan kyzy Meerim

ID: 3941 
 
 
 
 
 
 
 

Bishkek 2011 
 

Content: 
 

Data description                                                                                                     18

Conclusion                                                                                                          18-20

Bibliography                                                                                                       21-22 
 
 
 
 
 
 
 
 
 
 
 
 

Glossary:

Foreign Direct Investment (FDI) – is international capital flows in which a firm in one country creates or expands a subsidiary in another country.  The distinctive feature of FDI is that it involves not only a transfer of resources but also acquisition of control (Krugman, Obstfeld 169).  

Heckscher  -  Ohlin  -  Samuelson (HOS) -  model  suggests that  international  trade  can  substitute  FDI  by  moving  freely  factors  of  production  (labour  and  capital)  between countries. Based on the assumptions of the neoclassical HOS framework, where the flows of FDI depend on the differences in factor prices and factor endowments between countries (Pham, Nguyen 2). 

Horizontal Integration – means that multinational enterprises produce the same product in multiple plants located in more than one country. Horizontally integrated firms often arise because of trade barriers in the form of tariffs or high transport costs (Vuksic 10). 

Vertical Integration – separate segments of production process are carried out in different countries. The production process is likely to be geographically fragmented depending on the countries different factor- prices and stages of production with different factor intensities. So, there is a trade of intermediary products (Vuksic 10). 
 
 
 
 
 
 
 
 
 
 
 
 
 

Introduction

      During recent decades foreign direct investments (FDI) became a significant factor for increasing of export performance of the host country. Nowadays China is a second largest economy in the world after USA. Export growth has continued to be a major component supporting China's rapid economic growth. In 2010 China’s exports were $1’578 billions, that comprise 10.3 percent of world exports and 39.7 percent of Chinese GDP¹.  During 30 years China became a leading exporter that supplies the entire world. How this country achieved rapid economic growth and succeeds in export performance? What factors influenced on such results? Can small Kyrgyzstan from Central Asia achieve sustainable economic growth through large exports like Chinese economy? 

      Many economists affirm that developing and underdeveloped countries wallowed in poverty. There are a lot of theoretical explanations for such situation one of them is vicious circle of poorness. For instance, according to Nurkse, it is about capital deficiency. The concept explains that capital scarcity is one of the reasons of low level of productivity, which results in low income level. Consequently, there is weak purchasing power which results in insufficient incentives for the investment (Nureev 141).

Picture 1. R. Nurkses “Vicious circle” of capital deficiency

      Influence of foreign direct investment on exports has been actual issue in the past and it is still important for modern economists. According to economists- Harrod and Domar “Big Push” theory, investments stimulate the development of the economy, long run economic growth and getting out from vicious cycle of underdevelopment. Authors of the model stated that injection of large investments to the economy results in the beginning of self sustained growth. However, monetary and credit policy and tax policy of the government can not provide necessary amount of capital. Scarcity of investments in the country can be compensated by importation of capital. The amount of injection has to be sufficient, in other case there is a risk that all investments will be spent for the support of current demand, but not for support of entrepreneurs and production capacity in the economy. According to Leibenstein, minimal amount of injection – investments have to be 12-15% of GDP. Such push increases average income rate per capita and amount of entrepreneurs, who will support further growth of GDP and exports respectively (Nureev 149-150). 

      The economy of Kyrgyzstan during latest years declines. One of the reasons is political instability, revolutions in 2005 and 2010. Frequent reelection of government officials, high level of corruption and bureaucracy, all of these are reasons of macroeconomic instability. Year by year we observe increasing of inflation rates, decreasing of population living standards and worsening of infrastructure. Young generation move abroad for higher earnings, do not seeing future of the country. At this moment in time government officials should approve huge projects for economic development. One of them is injection of huge investments to the economy (Big Push Theory) for increasing of production rates and then increasing of exports. Because of the fact that there is a huge budget deficit in the economy, and there are not enough resources for huge investments, government should attract more foreign capital.

      As it was mentioned before, foreign direct investments according to empirical assessment play an important role on the export performance of the host country. And exports, in its turn, are considered to be as an engine of economic growth. For implementation of international projects, government should figure out all advantages and disadvantages from FDI and specifically the influence of FDI on export performance of the economy in percentages. Whether the influence of this variable will be positive and significant or it will be just time and money wasting. So the purpose of this paper is to investigate the influence of foreign direct investments on exports in Kyrgyzstan during the period from 2000 till 2010.

      Therefore the hypothesis would be an increase in the amount of FDI inflows to Kyrgyzstan leads to an increase of export volumes.

      For achieving an objective of this research, first we should analyze works that were done on this issue before, then investigate theory on the relationship between FDI and exports. After that we should establish methodology that will be used for the estimation of dependent variable, and then collect relevant data. 

      There are many previous researches on this topic, and influence of FDI on exports in various countries differs from each other. There are no identical economies, so in one country the influence can be huge, while in the other typical country can be no correlation between FDI and exports. The hugest influence of FDI is found in Cameroon by an economist Njong in his research conducted for the period between 1980- 2003. According to his empirical results 1% increase in FDI stock leads to 9% increase of exports. In the other research by Vuksic, 1% increase in FDI stock led to a 0.09% increase of exports in Croatian manufacturing industry was revealed. In the North European Union (NEU) economies 1% increase in FDI stock led to 0.16% increase of exports in short run and 0.42% increase in long run (Kutan and Vuksic 2005). In the case of Taiwan, the author found positive but not significant influence of FDI on export growth (Lee 2007). Also there are other researches conducted on 49 developing countries, 9 CIS economies, which will be analyzed in detail further in research. Now let’s briefly observe theory on FDI and exports in the following paragraph.

      One theoretical model- theory on multinational enterprises (MNE) is used for the explanation of the reason why corporations become MNEs. And three theoretical models such as the flying geese model, Vernon’s product life cycle theory and new growth theory are applied to explain the phenomenon of FDI inflows and its influence on export volumes of the country will be investigated in the theoretical part of the research.

      For the estimation of the impact of FDI on exports time series approach will be applied as methodology of the research.  
 

Literature review

   The purpose of this section as was mentioned above to analyze the works with the hypothesis that increase in the amount of FDI inflows leads to an increase of export volumes in the country, and to find the factors which influenced on the obtained results. 

      Authors of the collected literature for the investigation of the impact of FDI on exports employed different time spans- long run and short run, studied countries with different levels of development – developed and advanced economies or developing economies. Also for the obtaining of reliable results researchers used various explanatory variables that play major role on the estimation of the effects of independent variables on estimated one.  

     First, let’s analyze collected literature on the employed time span. Here are authors that employed short run period for the observation, less than 15 years- Vuksic, Kutan and Vuksic, Awokuse and Gu, Ibrahimova. And researchers with observations more than 15 years- long run period- Njong, Zhang, Majeed and Ahmad, Lee, Johnson, Pham and Nguyen.

      Comparing the empirical results of all collected researches by time span, there was found that all of the researches had positive and significant impact of FDI on exports, except the work of Ibrahimova. The study on nine CIS countries during the period of 13 years (1995-2008) resulted in significant negative effects of FDI on exports. One of the reasons of having such result is in the shortage of data. The author used data on aggregate level, not distinguishing them into sectors. And including shorter time span- 13 years might also had an impact on the received results. But in other researches with also short- run period, even shorter period than in this research, all of the authors obtained positive results. However, employing longer time span, anyway, allows for researcher to observe the influence of FDI on exports in more detail. How fast the impact of FDI on exports will be seen, depends on the initial situation of the host country. According to Kutan and Vuksic (11) foreign companies purchase domestic firms and further results of its influence depends on its initial productivity. If the plant had higher average productivity, so the impact of FDI on production will be seen immediately. In other case, if the plant had lower productivity before, then for observing more clear influence of FDI on production will be seen after 2 years of acquisition of a firm by a foreign company. Necessity of time, for transition of more developed technology, learning market behavior, managerial skills and other business skills from multinationals, take place here. So, for obtaining of more clear results, researchers should employ longer time span, but still it depends on the level of development of the observed economy. 

      In the further paragraphs we will discuss the influence of FDI on exports in countries with different development levels. Let’s start from the researches on developed and transition economies.  

      Kutan and Vuksic in their research over 12 Central and Eastern European economies (one developing country, six economies in transition and five developed economies) found out positive and significant influence of FDI on export performance. For North European Union (NEU) countries a 1 percent increase in FDI stock lead to 0.16 percent increasing of exports in short run and 0.42 percent in long run, through FDI – specific effect only (spillover effects). According to the estimation, in NEU countries FDI created higher level of competitive advantage which spread to the domestic producers. The reason for having more significant impact of FDI on NEU economies is that NEU countries are more developed than the Southeast European economies. They have relatively more productive companies, which allow for multinationals increase production. So, as it was mentioned before in plants with higher average productivity the impact of FDI on production will be seen immediately. Also, another factor of no small importance of having more significant impact of FDI on exports to NEU economies is that these countries accumulated more FDI inflows comparing to SEU countries (Kutan and Vuksic 11-12).

      In the other research by Vuksic, 1 percent increase in FDI stock led to a 0.09 percent increase of exports in Croatian manufacturing industry was revealed. During a previous decade there was weak development of manufacturing exports and relatively high FDI inflows to Croatia. The reasons of a small export performance according to the author are (1) war conditions in the country, (2) loss of important export markets in some other former republics of Yugoslavia, (3) slow and inefficient privatization and (4) low export competitiveness (Vuksic 5).

      In two researches conducted on Chinese economy: first on six manufacturing industries (Awokuse and Gu 2007), second on 186 industries (Zhang 2005), was found out positive influence of FDI on exports. More concretely, on the first research the most significant influence was on Machinery and transport equipment (MACH) sector with coefficient of 0.64, on the other sectors: food, textile, mineral fuels and chemical industries FDI promotes their exports as well. However, exports in beverages and tobacco industry decrease as FDI flows in. This might be due to the intensiveness of the competition in beverage world markets (Awokuse and Gu 17). In the second research the author revealed that export boom was mostly by well organized FDI strategy and comparative advantages, such as, large country size and lower relative wage costs. The effect of FDI on exports was clearly larger in labor- intensive industries than in capital- intensive industries (Zhang 9).

      Observing the influence of FDI on exports in developed economies we see that in all works authors obtained positive impact of FDI on exports. Of course, the significance and coefficients in all countries differ from each other depending on the type of a market, or on a development, comparative advantages and other factors. In the further paragraphs we will observe studies that were conducted in developing economies.

      The hugest influence of FDI is found in Cameroon by an economist Njnog. According to his empirical results 1 percent increase in FDI stock leads to 9 percent increase of exports (Njong 17).  There are a lot of reasons for increasing of exports: devaluation of country’s currency in 1994, market liberalization and investment policy liberalization. Government adopted series of reforms on the attraction of foreign investments, the structure of a National Industrial Free Trade Zone.  Due to all these changes adopted by government, increased investments, exports have grown rapidly over 11 percent per year while GDP growth was about 4.5 percent over the period 1994-2003 (Njong 2). 

      In the other researches by Lee, Pham and Ngyuen, Majeed and Ahmad, Johnson, conducted in Taiwan, Vietnam and other 49 developing countries, authors found positive influences of FDI on export growth. Three out of five researches found positive and significant impact.

      In the United Nations Conference on Trade and Development was noted that owing to multinationals domestic firms have an opportunity for expanding of their export performance. During the process of taking integration strategies between parent MNE and its subsidiaries, local firms obtain an access to the international market by linking themselves to MNE subsidiaries through different agreements (qtd in Lee 16). Competition between MNEs subsidiaries and domestic firms provoke domestic firms’ incentives to increase their exports. Zhang (4) notes that because of competition domestic firms’ learn by watching to protect their market share and earnings (Mom 2008, Zhang 2005, Vuksic 2006, Lee 2007, Majee and Eatzaz 2007, Awokuse and Gu 2007, Kutan and Vuksic 2005, Jayachandran and Seilan 2010, Pham and Nguyen 2007). Thereby, MNEs improve production capacity and export performance of host countries.

      Comparing collected researches by the level of development of countries, all of the researches obtained positive results, except the one, that was conducted in CIS countries. Here, the Product Life Cycle theory, which will be discussed in the theoretical part, can explain the reason of having positive influence of FDI on exports not depending on the development of the country. Having analyzed collected literature on used time span and the level of development of the host countries, let’s continue our analysis with used explanatory variables on the estimation of the influence of FDI on exports. 

      All of the researchers used various explanatory variables that influence on exports, but the most used are FDI, GDP and REER. Six out of ten works used these variables and also other ones, but different form each other in their models. For example, Vuksic added to this package of independent variables also wage rate, Kutan and Vuksic- trade liberalization index, Njong added also trade liberalization index, external market access indicator and lagged exports, and Ibrahimova added trade openness index. Other researches, for instance, Zhang used FDI, domestic investments, wage rate, scale economies and industrial dummy based on factor intensity. Lee used only two variables - lagged exports and FDI. Johnson also used two variables FDI inflows and outflows. Awokuse and Gu used the biggest quantity of variables, they are lagged exports, REER, imports, domestic investment, research and development level, firm size for economies of scale, wage rate and FDI. And finally, Majeed and Ahmad, used FDI, GDP, national savings, indirect taxes and REER.           

      Comparing research results on used explanatory variables, it is found that research results do not depend on the amount of used variables. There are two works that used only two variables (Lee and Johnson), and it is seen that they both obtained positive impact of FDI on exports. However, omitting relevant explanatory variables on the model may result in the biasedness of obtained estimator.

      Why all of the researches not depending on the period of observations, level of countries’ development and used explanatory variables obtained positive influence of FDI on exports, but in the case of CIS countries, there was found negative significant impact? Is it that CIS countries should not attract foreign investments to their economies and stimulate other factors that increase exports?

      In this research, the author for obtaining reliable results used three different methods: testing of pooled OLS, Fixed Effects and First-Difference estimation. So for further estimation may be researchers should use another methodology. The other reason might be that not all factors affecting FDI – export relationship have been taken into account. Also, the author did not divide influence of FDI on exports to direct and indirect spillover effects that might affect positively domestic production. Other reasons of having negative results are in the shortage of data in CIS countries and that the data were taken on aggregate level, not distinguishing among sectors. But still the author had 126 observations on each of the variables, that were obtained from reliable sources- UNCTAD and IMF databases.

      Analyzing this research and reasons of having such result, I came to the conclusion that for further research on CIS countries, researchers should find more data, including longer time span, introduce more variables and use another methodology. In my opinion, the development of CIS countries also influenced on obtained results. There is possibility that FDI influenced on production level, but not as much as that country supplied all domestic demand and the rest for exports. Or there is corruption rate that is too high, and most of foreign investments were directed to the specific interest group of people. However, there is a research that claims that high FDI inflows to the host country deter its corruption rate.

      Flow of investments to the country not only improve production capacity but also multinationals show domestic firms how to work better with less corruption and bureaucracy level. Tavares and Larrain (2004) in their research conducted for the period of 24 years and broad cross- section of countries (Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Iran, Italy, Japan, South Korea, Mexico, Netherlands, Poland, Spain, Turkey, the United Kingdom and the United States) proved that higher the FDI inflows to the country results in decreasing of corruption rate of the economy. Authors revealed that 1 percent increase in FDI leads to decrease of corruption rate by 0.3 percents. With such results, for the development of the economy, countries should attract more investments to the country, by switching from centrally planned economic system to the one that is based on market forces, open economy.

     Having a significant and positive effect of FDI on exports also was because of a shift of economies from protectionist trade policy to an open and export oriented economy by lowering tariffs and entering to different free trade organizations. For example, World Trade Organization (WTO), National Industrial Free Trade Zone (NIFTZ), North American Free Trade Agreement (NAFTA) and many others. Movement to a more liberalized environment, improved policies for attraction of foreign investments, good governance, low rate of corruption and achievement of macroeconomic stability are appropriate environment for foreign investment inflows (Zhang 2004; Kutan and Vuksic 2004; Mom 2008; Lee 2007; Vuksic 2006; Awokuse and Gu 2007).  

Theoretical background of FDI and exports

This section of my research investigates economic theory on influence of FDI on exports. First, we will discuss theory on multinational enterprises, then Flying Geese model, Product Life Cycle theory and finally New Growth theory.

Theory of multinational enterprises (MNE)

      The theory of multinational enterprise investigates conditions under which firms can undertake foreign direct investment and become MNE.

      Companies become multinational enterprises because of having certain advantages comparing to other rival firms.  It is obvious, companies running business in foreign countries have higher costs than domestic firms, but still they are able to produce because of having other specific advantages that compensate expenses (Vuksic 9; Kutan and Viksic 3; Zhang 4; Majeed and Ahmad 736). Dunning in his OLI paradigm organized these advantages into three groups: 

1. Ownership advantage – O: multinational firm must have a monopoly power in the host country’s market;
2. Location advantage – L: reason to locate production abroad;
3. Internalization advantage – I: incentive to exploit its ownership advantage internally (qtd. in Vuksic 9; in Kutan and Vuksic 3).

Firms have different motives for becoming multinational corporations and according to these reasons they define type of foreign direct investment.

      In OLI paradigm, there are three types of foreign direct investment: market-seeking, resource-seeking and strategic asset- seeking. Most of foreign investments are market and resource- seeking. Resource-seeking means both natural resource and labor-seeking investments, while strategic asset-seeking investments mean the acquisition of local firms.

      Generally, theory of MNEs describes main reasons and conditions of companies for becoming MNEs. Having specific advantages such as ownership, location and internalization advantages firms undertake FDI and produce in abroad. Mostly foreigners invest their capital to increase their production, searching for new markets, and to produce with lower costs, searching for cheaper resources. Also, companies differentiate their FDI locations depending on the conditions of international trade, such as tariffs and transport costs. Having explored theory of multinational corporations lets move to the explanation of influence of FDI on exports in the further paragraphs.

Flying Geese Model

      The term “flying geese pattern of development” was invented by Japanese economist Akamatsu in the 1930s and introduced to the world in early 1960s (Njong 11; Lee 20). “The model was developed based on the observation of the Asian economies and FG model provides a migratory image where Japan is a leading country in industrialization in Asia, while other countries fly behind and emulate the Japanese model” (Lee 20). The essential factors in FG model are labor cost and openness. Corporations having high labor costs in their countries (for example, Japan), undertake FDI to the lower labor cost countries (other Asian economies). With the lapse of time, when these countries have developed, they become high labor cost host country. Become importers, being exporters. Thereby, corporations relocate production process from developed and advanced economies to developing countries (Njong 11; Lee 20).

      The model points out that MNE subsidiaries increase host countries export performance by using of a host country’s factor endowments to produce at lower costs. Increased export competitiveness stimulates local producers, there by increasing of export capacity. FDI inflows bring not only capital to the host country, but also it has spillover effects, through which production and export abilities are improved. Let’s observe the other explanation of moving FDI from developed economies to developing countries in the next paragraph. 

Product Life Cycle (PLC) Theory        

      Vernon’s Product Life Cycle theory was introduced in 1966 to provide a structure to explain the phenomenon of the increasing FDI from US MNEs and its influence on trade flows. There are four stages of production in the PLC theory: innovation, growth, maturity and decline. According to Vernon, at the first stage of production, US MNEs tend to produce new and innovative products in the US for mainly domestic consumption without any foreign direct investments. And the rest of the production they used for exporting purposes. As the products progress to the growth stage and become high in demand and productivity, the US corporations undertake FDI and set up production of the products in different newly industrialized countries. Consequently, US exports decline and American consumers import products from those foreign industrialized countries (Mom 11; Lee 21).

      In the maturity phase of the production process raises the problem of cost reduction for the producers. In this case MNEs move their production from advanced countries to the ones with lower production costs, developing countries. Part of the products supply host countries demand and the other is exported to the US consumption and other foreign markets. So during last decades, USA and other developed countries became importers from being exporters. At the last stage of PLC, the cost minimization becomes the first target for MNEs. They allocate their production to the countries with the cheapest costs, and to the countries which have comparative advantages of production (Mom 12; Lee 22).

      PLC theory describes four stages of production, in which MNEs move their production process from developed to developing economies. These movements depend on the stages of production; if it is innovation stage then US corporations develop and supply only domestic consumers. In the growth stage, US corporations undertake FDI and locate their production process in developed economies. In the next two stages, maturity and decline, searching for minimal costs, they relocate their production process to the developing countries. In the next paragraph, we will explore the importance of technological progress and knowledge skills from FDI for the development of host countries.     
 

New Growth Theory              

      Cortright (2001) notes, that new growth theory includes two important points. First, it views technological progress as a product of economic activity. Second, new growth theory suggests that knowledge and technology are characterized by increasing returns and these increasing returns drive the growth process (qtd. in Lee 23). Investment in knowledge capital contributes to increasing returns in production function and the more resources devoted to research and development, the faster the rate of innovations and the higher the rate of growth (Lee 24).

      According to Mom (12) and Lee (24) the capital accumulation FDI generates non- convex growth by combination of new inputs and foreign technologies in the production function of the MNE subsidiaries economies. The transfer of advanced technology develops knowledge through labor training, skill acquisition, introduction of alternative management practices and organizational structure. In the result, FDI improves productivity of the host country and also FDI can be a catalyst for domestic investment and technological progress (Lee 24; Mom 13).   

     Conclusion, in this section of my research, we investigated theoretical background on FDI and its influence on host countries exports. Theory of multinational enterprises aimed in description of main reasons and conditions of companies for becoming MNEs. Also there are, provided OLI paradigm, types of FDI and differentiation of the production location. Next, we observed Flying Geese model, and Product Life Cycle theory. Each of these models describes the relocation of the production process to developing economies for decreasing of production costs, but in different ways. Finally, there was a New Growth theory, which pointed out that the transfer of technological progress and knowledge by FDIs to developing countries stimulate their production, domestic investments and overall development.      
 
 

Methodology

      This section illustrates methodology for revealing potential effect of FDI on export performance in Kyrgyzstan.  Chosen model in this research is the model that was used by the researcher Njong, who investigated an impact of FDI on exports in Cameroon. This author got highest positive result among other collected works, so in my opinion chosen methodology plays important role in obtaining reliable and clear results. 

      This paper carries out time series estimation, using total exports as the dependent variable, and FDI, REER, GDP, Trade Liberalization Index (TLI) and External Market Access Indicator (MKT) as explanatory variables. This results in the following time series equation:

where subscript t denotes time and ε is the error term.

      Relative price level is important factor that explains country’s exports, according to macroeconomic theory. Including real effective exchange rate (REER) is a good measure that captures the competitiveness of Kyrgyz Republic economy. The indicator is constructed in a way that an increase in REER means a real appreciation of the national currency.  So, the coefficient α₁ is expected to be negative.

      Gross domestic product (GDP) variable is included to capture the effects of increased FDI inflows on increased supply capacity of the country. The coefficient α₂ is expected to be positive.

      Trade liberalization index (TLI) is calculated as import ratio on total international trade volume. And external market access indicator (MKT) which is approximated by the growth rate of export penetration index is calculated as the ratio of exports on total international trade (Njong 14). The reason of including these indicators is to observe the potential impact of the trade liberalization measures adopted by the government. Expected coefficients of α₃ and α₄ are positive.

      First equation is our benchmark equation. In the second model, FDI variable is added to track its direct and indirect effects on production and export performance of the host country. The coefficient α₅ therefore is expected to be positive.  

Data description

      In this research data is collected from primary and secondary sources. Exports, import and REER are taken from National Bank of Kyrgyz Republic (NBKR). FDI inflows and GDP are taken from National Statistics Committee of Kyrgyz Republic. Also some numbers were taken from United Nations Conference on Trade and Development (UNCTAD) and from International Monetary Fund (IMF) databases. An observed period in the research will be from 2000 till 2011, covering quarterly data on variables – 47 observations. Now let’s examine FDI and exports trends in Kyrgyzstan during 20 years.

Insert figure 1. FDI inflows and exports in Kyrgyzstan in million $, 1991-2010

      Looking at the graph we observe that changes in foreign investment inflows to the country influences on exports. During 1997-2001 was financial crisis in Russia that had impact on slow investment flows. Panic among Russian investors decreased growth of investments to Kyrgyzstan that influenced on export volumes.  Also macroeconomic instability in 2005 and 2010 was result of revolutions influenced on decreasing of FDI inflows. On the graph we see that World Financial Crisis also left its mark on the investment and exports levels in the country. There was a sharp increase and then immediately decrease of export volumes.     

Conclusion

      This research provided an analysis of the obtained results of existing literature on the influence of FDI on export performance of the host country.  Comparing all of the researches by employed time spans- long run and short run, the level of development of observed countries and used explanatory variables, it is found that in some cases using of whether short run or long run period may not influence on obtained results, but in other cases it influences on outcome. Here are the cases of the works by Ibrahimova on nine CIS countries, who obtained negative and significant impact using longer time span 13 years, Kutan and Vuksic on European countries and Vuksic on Croatian economy, who found positive results using shorter time spans 8 and 6 years respectively. On the research we investigated that rapidity of the impact of FDI on exports depends on the initial situation of the host country. Necessity of time, for transition of more developed technology, learning market behavior, managerial skills and other business skills from multinationals, take place here. So, for obtaining of more clear results, researchers should employ longer time span, but still it depends on the level of development of the observed economy.     

      Comparing research results on used explanatory variables, it is found that research results do not depend on the amount of used variables. There are two works that used only two variables (Lee and Johnson), and it is seen that they both obtained positive impact of FDI on exports. However, omitting relevant explanatory variables on the model may result in the biasedness of obtained estimator.

      Almost all of the researchers found positive results, 6 out of 10 works found positive and significant results and one found negative significant impact. For having such influence of FDI on exports can be explained by theoretical models- Flying Geese model, Product Life Cycle theory and New Growth theory. In the flying geese model, FDI is allocated to the country where the factor endowments would reduce production costs (developing countries). The location of FDI changes over time in line with the country’s level of development. With a lapse of time these developing countries with foreign investments develop through spillover effects of FDI and MNEs subsidiaries move to another developing country with lower production costs. As for the flow of FDI in the product life cycle theory, movement of FDI locations depend on the stage of production. At the beginning, FDI in the host country is mainly for local consumption. Then with increasing of the production and consumers demand, producers search for the minimal costs location for production process. Starting from developed and industrialized economies, FDI moves to developing countries. In terms of the role of FDI in new growth theory, FDI can be a catalyst for domestic investment and technology progress. There is not only direct effect of FDI but also spillover effects of FDI on export growth through MNEs and domestic firms.

      Also obtained results depend on economies trade policy and investment climate in the country. All of the observed economies moved from protectionist trade policy to an open and export oriented economies by lowering tariffs and entering to different free trade organizations. Movement to a more liberalized environment, improved policies for attraction of foreign investments, good governance, low rate of corruption and achievement of macroeconomic stability are appropriate environment for foreign investment inflows. 

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National Statistical Committee

<http://www.stat.kg>

International Monetary Fund Database

<http://www.imf.org>

United Nations Conference on Trade and Development Database

<http://www.unctad.org>