The Determinants and Impacts of Foreign Direct Investment

Accolley, Delali (2003): The Determinants and Impacts of Foreign Direct Investment.

Abstract

Some theories on the determinants and the impacts of foreign direct investment (FDI) are reviewed and critically assessed. Two empirical investigations follow this review. The first uses simultaneous equation models to test the effects of some US macroeconomic variables on their FDI inflows. The second analyzes the relationship between FDI inflows and outflows among developed countries, using a variety of panel data models.

As novelty, the investigation of the determinants of the location of FDI inflows shows the central role played by the expectations about the future growth rate of the US economy. The assumption that foreign investors does not base the decision of FDI on the current growth rate but instead form adaptive expectations more than doubles the determination coefficient of the econometric model. Beside the adjustment of foreign investors to their forecast errors, the size of the US economy measured by the gross domestic product turns out to be the most important determinant of their FDI inflows. Even though the bulk of FDI takes place among developed countries, the panel data analysis reveals some heterogeneity that is fixed over time.

• Item Type: MPRA Paper
• Language: English
• Keywords: cointegration, foreign direct investment, panel data models, simultaneous equation models, two-stage least squares, VAR
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models; F - International Economics > F2 - International Factor Movements and International Business; F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms ; International Business

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