Download Economic, political and Geographical determinants of FDI: robustness check:

Economic, Political and Geographical Determinants of FDI:
Robustness Check
Melissa Chanegriha
The uncertainty surrounding foreign direct investment (FDI) theories
and empirical approaches has created much ambiguity regarding the
determinants of FDI .This paper use checks and identifies the
robustness of the determinants of (FDI) using a large panel data
sample that covers 168 countries, 56 variables, over the period 1970
to 2006. We use the recent extreme bound analysis (EBA) method to
address model uncertainty in the presence of selection bias. We
show that more than half of the previously suggested FDI
determinants are no longer robust once the econometric EBA
procedure is applied. Our results highlight the main theories that
receive support from data. Seven variables are found to be the
robust determinant of FDI inflows. Countries need to reinforce its
infrastructure facilities, liberalise its local and global investment policy
and maintain macroeconomic and political stability to improve its
inward FDI performance and potential index and to become an
attractive destination for foreign investors.
JEL classification : F20;F30;C19
1 Background:
Theory of FDI does not provide enough guidance regarding which variables can be
kept in a model. Thus several different models may all seems reasonable given the
data but generate different conclusions about the parameters of interest.
The Extreme Bound Analysis (EBA) approach is applied to conduct a sensitivity
analysis on our sample and to analyze to what extent various variables are robust or
fragile determinants of FDI.
2 Method: The Mechanics of EBA
The standard way of conducting the EBA test is by dividing the variables into four
groups: the dependent variable, the core variables, the selected variable of interest,
and the three combination variables
(
⁄
)
…..……………………………….(1)
Where FDI /GDP is the dependent variable; X denotes the n standard core
explanatory variables1 that are included in every single regression (including a
constant). I is the variable of interest in each EBA whose robustness we are testing,
and Z is a vector of up to three possible additional explanatory variables chosen from
a pool of explanatory variables.
Melissa Chanegriha, Final year PHD student in Economics, Department of Economic Business and
Finance, London Metropolitan university, UK, London Email: [email protected].
1
These variables are included because they were identified as the main factors determining FDI in our previous
chapter
1