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Leaders’ Foreign Travel and Foreign Investment Inflows

Kodila-Tedika, Oasis and Khalifa, Sherif (2020): Leaders’ Foreign Travel and Foreign Investment Inflows.

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This paper examines the effect of foreign travel by the leader of a country or the head of state on the ability of the country to attract foreign capital, as reflected by foreign direct investment inflows. The key difficulty in determining a causal effect is the issue of endogeneity. As much as the leader’s trips abroad may attract foreign capital inflows, it is also possible that leaders are tempted to visit countries known to have a high level of investment out of their borders. To deal with potential endogeneity, we use instrumental variable panel estimation techniques. The GMM estimation shows that the leader’s trips to the United States have a statistically significant positive coefficient on foreign direct investment inflows from the United States and total foreign investment inflows as well. This result implies that these trips by the leaders allow them the opportunity to attract foreign capital from the United States. This also implies that the decision by American firms to invest in the country send a strong signal of the confidence they have in that economy. This may encourage non-American companies to invest there as well.

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