Robust and fragile determinants of foreign direct investment: an extreme bounds analysis
Creators: name: ABBAS, Ali
Publisher: name: RMIT University
Year: 2024
Subjects: classificationCode: 380110
subject: International economics

description: The objectives of this thesis are to investigate the determinants of foreign direct investment (FDI) in a large sample of developed and developing countries and to establish whether or not cross-country differences affect FDI. The theoretical foundations of this research can be found in various theories of FDI, including theories assuming perfect markets and those assuming imperfect markets. The main underlying issue is that the theories of FDI are not precise enough to produce a limited set of determining variables, which invariably leads to data mining. To overcome this problem, extreme bounds analysis (EBA) is employed to distinguish between the robust and fragile determinants of FDI.<br><br>

The uncertainty surrounding the theory and empirics FDI has created much ambiguity regarding the determinants of FDI. This thesis provides an overview of the existing literature and carries out a comprehensive examination of the robust determinants of FDI. More importantly, this thesis demonstrates the possibility of obtaining biased estimation results by adding and deleting variables in a conventional cross-sectional regression model. The main objective of this thesis is to show that the results of previous studies on the determinants of FDI are highly sensitive to the number of explanatory variables, variable measurement, the use of flow data in contrast to stock data, the use of cross-sectional versus panel data, the estimation method, the use of linear as opposed to log-linear specifications, and the use of other forms of nonlinearity. Furthermore, this thesis establishes statistically robust relationships by applying extreme bounds analysis (EBA) to a sample of cross-sectional data covering 138 countries and 33 economic, political and institutional variables, over the period 1985 to 2016.<br><br>

The empirical analysis is based on a large and diverse data set collected from IMF, UNCTAD and the World Bank. The political and institutional variables are obtained from the International Country Risk Guide (ICRG). The traditional version of EBA and the revision introduced by Sala-i-Martin are employed. Two measures of FDI are used with 32 variables of interest and GDP as free variable. The application of EBA involves running a total of almost one million regressions for all samples (full sample, developed countries and developing countries) for both measures of FDI¿in million US dollars at current prices (FDIUSD) and as a percentage of GDP (FDIGDP). More specifically, 4495 regressions are run for each variable of interest (for each measure of FDI).<br><br>

By and large, the empirical results show that for each measure of FDI, there is a specific set of robust variables, which confirms the proposition that the determinants of FDI vary depending on which measure of FDI is used. Some variables may be robust for a particular measure of FDI but fragile for another measure. When Sala-i-Martin's EBA is used, nine robust variables are revealed for each sample. The empirical results indicate that to become attractive destinations for foreign direct investment, countries need to reinforce their infrastructure facilities, liberalise their local and global investment policies, improve the quality of governance and reduce corruption, internal and external conflicts and political risk. Positive steps include making regulations less intrusive and investing in the nation's human capital. Furthermore, research and development provide a basis for technological advancements, which would enhance FDI inflows.