additional investment in the expectation (or realization) of an improved econornic environment.

In a recent study, Edwards [11990] attempted to estimate the deterrminants of foreign direct investment to developing countries. Based on the empirical and theoretical literature on FDI, he selected a set of structural variables, deemed to be of relevance in the decisionmaking process of a foreign investor. Tfhese variables were used to estimate the everage level of FDI relative to GDP as well as the percentage share in total FDI to developing countries for a cross-section of 58 developing countries during the period 1971-81. The central independent variables, Edwards included in his regression, were: _- Income per capita_ as a proxy for the (inverse of the) return on capital and its coefficient was expected to be negative. While it seems obvious that foreign direct investors will detennine their investments based on the expected rate of return, such data are not generally available, especially in the case of poorer countries. As a proxy, Edwards uses income per capita, expecting that countries with a lower per capita income will tend to receive a higher share of FDI.

_- Foreign trade_ as a measure of the country's openness with a positive coefficient expected. Given that most foreign investment projects are directed towards the tradables sector, the country's degree of openness with respect to international trade should be a relevant factor in the decision.

_- Domestic investment_ as an indicator for the general investment climate. Given that domestic and foreign investments are complements, the coefficient should be positive.

_- Government consumption_ as a measure of the size of the government with a negative expected coefficient. The government size with respect to domestic economic activity is assumed to be proxy for the host country's stance towards private initiative.

- the _real exchange rate_ as measured by Summers and Heston as an indicator of the country's degree of international competitiveness with a depreciating real exchange rate reflecting improved competitiveness. As in the case of the foreign trade variable, the foreign investors' focus on the tradables sector implies that exchange rate movenients and the general economic competitiveness of the host country should matter for the investment decision.

_- real GDP_ was included in the FDI share regression as a measure of the size of the economy and potential extent of scale economies; the coefficient was expected to be positive.

Using these same independent variables, the model was first re-estimated with only minor modifications for a cross-section of 21 countries<sup>23</sup> for the period 1988-92 using OLS. The selection of countries was based on the existence of sizable privatization programs during the period as well as data availability.24 Following Edwards, the FDI determinants were

> 23 These countries are Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Honduras, Jamaica, Kenya, Malaysia, Mexico, Nigeria, Pakistan, Peru, the Philippines, Poland, Portugal, Sri Lanka, Thailand, Turkey, and Venezuela.

> 24 Seven countries had to be elimninated for data icasons: Benin, China, Czechoslovakia, Hungary, India, Panama, and Togo.

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