Date of Degree
Thom B. Thurston
Peter C. Y. Chow
At first, a literature review of over 150 articles on the determination of Foreign Direct Investment (FDI) proposes the main determinants of FDI. A meta-analysis tests the reliability of the previous studies on FDI.
Then, a cluster analysis on FDI data reveals the necessary to segment economies, especially by income level, in FDI analysis.
A large number of studies emphasize FDI determinants but ignore the income distribution on the results, which biases the estimates. In Chapter 3, I correct for heterogeneity due to income distribution by using the Blundell-Bond System GMM (Generalized Method of Moments), which controls for endogeneity problem as well. I categorize the countries according to their level of development: high, middle and low income. I further break down the middle income category into upper and lower segments. I consider level effects and various interactive effects.
I find that income levels play a significant role in FDI determination model. Controlling for income levels corrects the sign and the magnitude of a number of estimates. In particular, results show that low income countries attract more FDI, ceteris paribus. This result is in stark contrast with the traditional consensus that capital flows to rich countries (Lucas 1990). Moreover, modeling income levels shows that lagged FDI has consistently positive effect on FDI, which is a dynamic model structure. Consistent with the literature, market potential and education boost FDI and results are robust to income levels. FDI increases with risk levels because during financial or economic crises it replaces other investments. Tax rates overall exert downward pressure on FDI, but mostly when the middle and low income levels are controlled for. This article also supports the Tariff Jumping FDI argument in middle and low income economies, according to which, FDI is a potential substitute for international trade. My results reject the hypothesis of the wealth effect of exchange rate, and there is weak evidence that the depreciation of local currency discourages FDI in particular in poorer countries. Results are stable for different specifications of income dummies (one intercept dummy, two intercept dummies, and slope dummies, etc).
Liang, Haitao, "Three Essays on the Determinants of Foreign Direct Investment (FDI)" (2010). CUNY Academic Works.