In the share regressions, however, the variable was not significant. Investment<sup>27</sup> , on the other hand, appears to be more relevant in the allocation of FDI among developing countries, being positive and statistically significant in the FDI share estimation, but not in the FDI per capita one. The same holds true for government consumption28, which is as expected negative and significant, but only in the share regression. Thus, a reduction of the economic size of the government attracts foreign investors, probably due to reduced intervention and market distortions. Differing from Edwards, the per capita income variable, which was statistically not significant but consistently negative in Edwards' analysis, does gea,erally not show the expected sign. This indicates that GDP per capita might not be a good proxy for profitability, as Edwards himself suggests. In fact, as he himself points out, investors will also be attracted by larger markets, allowing them to internalize prorits from sales within the country, rather than producing at low cost for exports only. Consequently, the coefficient on GDP per capita **turns** out insignificant simply because it picks up both effects simultaneously. The results on the international competitiveness variable were consistently positive and significant in the Edwards study. Here, however, the variable is insignificant, while of the correct sign.<sup>29</sup> The reason for this is most likely data related. Edwards used the Summers and Heston real exchange rate index, which is, however, not available from 1988 onwards. Therefore, the real effective exchange rate as calculated by the IMIF was used as a substitute.

The general fit of both regressions was quite good with an adjusted R<sup>2</sup> of 0.89 in the per capita estimation and 0.67 in the share regression. Both estimations also show a better overall fit compared to Edwards estimations.30 This might partially be explained by the use of population as the variable weight rather than GDP which all too often is distorted through exchange rate fluctuations.

These results do, however, not yet take into account the existence of' privatization programs. In order to estimate the effect of privatizations on the foreign direct investment decision, two variables were added to the model. _Privatization revenues per capita_ indicate the relative size of the existing privatization program in each country. Furthermore, _the foreign exchange ratio,_ defined as foreign exchange from privatizations as percentage share of total privatization revenues, was added as a measure of the country's openness with respect to foreign investors. Both coefficients are, of course, expected to be positive. Note that the dependent variable changes in both regressions: Given that the goal is to estimate secondary, indirect effects on FDI resulting from privatizations, FDI per capita as well as FDI share were recalculated by subtracting FDI resulting from privatizations from total FDI flows for each country. Thus, the estimated equations are modified as follows:

> 27 Defined as gross fixed domestic capital formation in the IMF National Accounts.

> **28** Derived from the IMF National Accounts.

> 29 The Summers and Heston measure of the real exchange rate is defined as local currency per USS, while the IME measure is defined in the reverse. Thus, the sign on the coefficient is expected to be negative.

> 30Edwards reports the unadjusted R2only with _0.592_ for the regression on the FDI level and 0.618 on the share regression. The comparative values for the estimations here were 0.918 and 0.771 respectively.

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