The Determinants of Foreign Direct Investments: Sensitivity Analyses of Cross‐Country Regressions

Abstract

A vast empirical literature has used ad hoc linear cross‐country regressions to search for the determinants of FDI. The literature is extensive and controversial. Can policy‐makers use this body of research to learn anything that can help them stimulate FDI? The author uses Extreme Bound Analysis (EBA) to examine if any of the conclusions from the existing studies is robust to small changes in the conditioning information set. The EBA upholds the robustness of the correlation between FDI and market‐size, as measured by per‐capita GDP, but indicates that the relation between FDI and many of the controversial variables (namely, tax, wage, openness, exchange rate, tariff, growth, and trade balance)bare highly sensitive to small alterations in the conditioning information set. The author also studies the distribution of the estimated coefficients of the controversial explanatory variables to rank them in order of their likelihood of their being correlated with FDI.

Institutionalized pollution havens

“…The sign and significance of our variables of interest remain very similar when scaling FDI by population or when using FDI without scaling. We note, however, that most empirical FDI papers scale FDI, most typically by GDP or population (for example, Singh and Jun 1995, Chakrabarti 2001, Portes and Rey 2005. 23 Figures showing marginal effects increasing with CHECKS and POLCON, estimated using models (1) to (8) in Tables 4 and 5, are highly consistent with Figures 1 -4 and are available upon request.…”

“…Next, models (3) and (4) examine the sensitivity of our results to our chosen instruments, again using CHECKS and POLCON, respectively. In these models we drop the two public infrastructure variables and replace them with the rate of inflation, a variable shown to be a deterrent to inward FDI (see, e.g., Schneider and Frey 1985, Singh and Jun 1995, Chakrabarti 2001. Alongside the rate of inflation we use a new measure of the size of a country, namely the total population.…”

Dynamic Effects of FDI, Trade Openness, Capital Formation and Human Capital on the Economic Growth Rate in the Least Developed Economies: Evidence from Nepal

“…As Chakrabarti noted such sparse and skewed empirical results are primarily attributed to the authors' perspectives, sample selection, methodologies and analytical tools applied in the study [37]. Besides, the country specific characteristics such as economical, technological, infrastructural and institutional developments indeed matter a lot in obtaining confounding results.…”

Political Risk, Institutions and Foreign Direct Investment

“…per capita, is probably the most important factor in explaining foreign investment (Chakrabarti, 2001). 8 The size of a particular market may indicate the attractiveness of a specific location for the investment, in the case that the multinational corporation aims to produce for the local market (horizontal or market-seeking FDI).…”

“…The empirical evidence, on the other hand, suggests that a positive link can be expected (Chakrabarti, 2001). …”