less important for drawing broad conclusions from the model.<sup>75</sup> The exception to this statement is the _RERGRO_ variable, which is not statistically significant under any approaches that do not specifically control for serial correlation.

Columns (3) and (4) investigate the sensitivity of results to the two new variables in equation (2): average distance to PTA partners and the REER growth rate. Excluding the distance variable has a very small impact on the coefficient estimates and significance levels of the control variables. Global growth becomes insignificant at the ten percent level, but in fact the _p_ -value increases from 0.083 to 0.102, which is not a large change. Consistent with intuition, the coefficient on _PTAGDP_ is much smaller with the distance variable excluded. This is because the former now controls for both the positive effects of joining a PTA and belonging to a larger common market and the negative effect of being located farther away from PTA partners.

Excluding the REER growth variable has a much stronger effect on the estimates. While the coefficients and significance levels of the PTA-related variables remain largely unchanged, both GDP growth and global growth become insignificant.<sup>76</sup> This suggests that REER dynamics play an important role in determining the distribution of net FDI inflows across countries, and ignoring this channel can lead to unexpected behavior of other model variables.

# **B.5 Decomposing model results by geographic region and income level**

The set of experiments in this section concerns further disaggregating the developing country results into geographic regions. The first region we consider is Latin America and the Caribbean. The sample consists of 24 countries and 465 observations, and the results are shown in column (1) of Table 15. Our model does not do well in explaining the variation in the dependent variable, since only GDP and world FDI are significantly different from zero at conventional confidence levels. On the other hand, _PTAGDP_ , _CPIGRO_ , and _RERGRO_ barely miss the ten percent significance threshold with _p_ -values of 0.109, 0.113, and 0.131, respectively. These results indicate that our model may still be applicable to the Latin American data, but that the relatively small size of the sample does not allow for efficient estimation with FGLS.

Next, we focus on East and South Asia. Here, we consider 14 countries which results in the sample size of 236 observations. The estimation results are shown in column (2). The only statistically significant variables are GDP, openness, world FDI, and the growth in the real effective exchange rate. Most importantly, neither of the PTA-related variables are significantly different from zero at any accepted confidence intervals (the relevant _p_ -values are 0.449 and 0.452 for _PTAGDP_ and _DISTA_ , respectively). Therefore, preferential liberalization does not appear to be an important determinant of net FDI for the low and middle income countries in East and South Asia, although the the sample size disclaimer mentioned while discussing the high income model is also applicable here. We also estimate a separate model for East Asian countries only, with the results shown in column (3) of Table 15. This sample contains 12 countries, which limits the number of available observations to 198. The results are roughly similar to the previous estimates, with three important differences. First, the coefficient on openness is much lower when we restrict the sample to East Asian countries only. One explanation for this could be that while the East Asian economies have traditionally been more open to trade, the same cannot be said of their South Asian counterparts.

> 75Recall that OLS, and by extension the fixed effects estimator, remains unbiased in the presence of heteroscedasticity and autocorrelation, but is no longer efficient. Therefore, if moving from equation (1) to equation (2) addresses most of the problems save for serial correlation and heteroscedasticity, we expect the differences between the FGLS and to diminish.

> 76The _p_ -values increase to 0.382 and 0.297, respectively.

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