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domestic labor and private capital

The Johansen cointegration test suggested that the hypothesis of no cointegrating vector can be rejected at least at the one percent level, thus suggesting the presence of at least one cointegrating equation from which residuals (EC terms) can be obtained to measure the respective deviations between the current level of output (labor productivity) and the level based on the long-run relationship.12 The presence of a cointegrating relationship among the selected variables in level form means that an error correction (EC) model can be estimated; viz., a model that combines both the short-run properties of economic relationships in first difference form as in equation (5) above, as well as the long-run information provided by the data in level form. EC models thus enable the researcher to estimate the speed of adjustment back to the long-run (stable) condition among the variables. The information provided by the Johansen test was used to generate the EC models presented in Table 4 below. To conserve space, the table presents results only for the labor productivity growth rate relationship. They show that the immediate impact of changes in the growth rate of the private capital stock are positive and statistically (and economically) significant, while contemporaneous changes in employment growth have a negative impact on the growth rate in labor productivity. The public capital stock variable also has a positive and statistically significant effect when lagged two to three periods. Turning to the foreign private capital stock variable, it can be seen that this variable has a positive and statistically significant effect when lagged four or five periods. This result as well as the one for the public capital stock — is not surprising because FDI-induced positive externalities in the form of a greater transfer of technology and managerial know-how are likely to impact labor productivity with a considerable lag. More importantly, the estimate for the interaction variable (D4 multiplied by the FDI variable) in equation (5) suggests that the sectorial change in the composition of FDI after 1995 had the effect of further enhancing the impact of FDI growth on labor productivity growth.