Exploring the Causality and Co-integration Relationship between FDI, GDP and Employment: A Case of Czech Republic

The paper investigate long term relationship between FDI, GDP and host country employment by using sector-wise panel data from 1993-2011 for the Czech Republic. IPS test is applied for panel data unit root testing and Johansen Fisher Panel Co-integration test is used to test for the presence of co-integration relationship between the variables. A vector error correction model (VECM) is estimated to find out the short run and long run causality between the variables. In the end, Impulse response functions are estimated. The paper found both a short term and long term causality going from FDI inflow to employment. Impulse responses show that both GDP and employment respond positively to an exogenous shock in FDI inflow. However, the employment response to FDI inflow shock is smaller than that of GDP response.