Page 65 - rohana_journal_No_12-2020-final

Research Journal of the University of Ruhuna, Sri Lanka- Rohana 12, 2020

Methodology

Model Specification

It was decided that the best method to adopt for investigating the long – run
relationships and short – run dynamic interactions of FDI inflows and specified

variables was the ARDL bounds test approach. The pioneers of introducing this
approach were Pesaran and Shin (1999) and Pesaran et al. (2001). As revealed by

some researchers three main advantages of this cointegration model can be seen.

(Harris and Sollis, 2003). The first advantage is that all variables included in the
model should not be integrated in the same order as the variables can be integrated

of I(0) or I(1). Secondly, this method is more efficient even in the case of small and
finite sample data sizes. Thirdly, through employing this approach, we can derive

unbiased estimates for the long – run model. In order to validate the suitability of the
model, necessary diagnostic tests are applied. Optimum lag lengths are based on

Akaike Information Critarion (AIC). The ARDL model used in this study can be

shown as follows:

∆ = + ∑ ∆ − + ∑ ∆ − + ∑ ∆ −
3
2

0
1
=1 =1 =1

+ ∑ ∆ − + ∑ ∆ − + ∑ ∆ −
4
5
6
=1 =1 −1

+ ∑ ∆ − + ∑ ∆ −
8
7
=1 =1

+ ∑ ∆ − + ∅ −1 + ∅ −1 + ∅ −1
2
2
1
9
=1
+ ∅ −1 + ∅ −1 + ∅ −1 + ∅ −1
6
3
4
5
+ ∅ −1 + ∅ −1 + ∅ −1
9
8
7
+ (01)

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