International Journal of Social Economics

Emerald Article: Analyses of FDI determinants in developing countries Recep Kok, Bernur Acikgoz Ersoy

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To cite this document: Recep Kok, Bernur Acikgoz Ersoy, (2009),"Analyses of FDI determinants in developing countries", International Journal of Social Economics, Vol. 36 Iss: 1 pp. 105 - 123 Permanent link to this document: http://dx.doi.org/10.1108/03068290910921226 Downloaded on: 05-08-2012 References: This document contains references to 98 other documents To copy this document: permissions@emeraldinsight.com This document has been downloaded 6795 times since 2009. *

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Analyses of FDI determinants in developing countries

Recep Kok
Economics Department, Dokuz Eylul University, Izmir, Turkey, and

Analyses of FDI determinants

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Bernur Acikgoz Ersoy

School of Applied Science, Celal Bayar University, Manisa, Turkey
Abstract
Purpose The purpose of this paper is to investigate the best determinants of foreign direct investment (FDI) in developing countries. Design/methodology/approach This paper investigates whether FDI determinants affect FDI based on both a panel of data (FMOLS-fully modied OLS) and cross-section SUR (seemingly unrelated regression) for 24 developing countries, over the period 1983-2005 for FMOLS and 1976-2005 for cross-section SUR. Findings The interaction of FDI with some FDI determinants have a strong positive effect on economic progress in developing countries, while the interaction of FDI with the total debt service/GDP and ination have a negative impact. The most important determinant of FDI is the communication variable. Research limitations/implications The limitations of the study are based on the development of data set which could be found uninterrupted for 30 years in 24 developing countries. Originality/value The main objective of this study is to dene the main FDI determinants that show the capital ows to developing countries in a globalization framework. The secondary objective of this study is to assign countries convergence by using the same FDI determinants. FDI ow is one of the main dynamics of globalization phenomenon thus FDI ow determinations will contribute to countries process of political development. Keywords Convergence, International investments, Developing countries, Globalization Paper type Research paper

1. Introduction Trade has traditionally been the principal mechanism linking national economies in order to create an international economy. FDI is a similar mechanism linking national economies; therefore, these two mechanisms reinforce each other. The trade effects of FDI depend on whether it is undertaken to gain access to natural resources, to consumer markets or whether the FDI is aimed at exploiting locational comparative advantage or other strategic assets such as research and development capabilities. Most developing countries lack technology capability and FDI to facilitate technology transfer and reduce the technology gap (TGAP) between developing countries and developed countries. In fact, it is suggested that spillovers or the external effects from FDI are the most signicant channels for the dissemination of modern technology (Blomstrom, 1989). FDI has innumerable other effects on the host countrys economy. It inuences the income, production, prices, employment, economic growth, development and general
JEL classication F21, F47

International Journal of Social Economics Vol. 36 Nos 1/2, 2009 pp. 105-123 q Emerald Group Publishing Limited 0306-8293 DOI 10.1108/03068290910921226

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welfare of the recipient country. It is also probably one of the most signicant factors leading to the globalization of the international economy. Thus, the enormous increase in FDI ows across countries is one of the clearest signs of the globalization of the world economy over the past 20 years (UNCTAD, 2006). Therefore, we can conclude that FDI is a key ingredient for successful economic growth in developing countries, because the very essence of economic development is the rapid and efcient transfer and adoption of best practice across borders. On the other hand, in general, foreign investors are inuenced by three broad groups of factors: (1) The protability of the projects. (2) The ease with which subsidiaries operations can be integrated into investors global strategies. (3) The overall quality of the host countrys enabling environment (Christiansen and Ogutcu, 2002). A large number of studies have been conducted to identify the determinants of FDI but no consensus has emerged, in the sense that there is no widely accepted set of explanatory variables that can be regarded as the true determinants of FDI. The results produced by studies of FDI are typically sensitive to these factors, indicating a lack of robustness. For example, factors such as labor costs, trade barriers, trade balance, exchange rate, R&D and tax have been found to have both negative and positive effects on FDI. Chakrabarti (2001) concludes that the relation between FDI and many of the controversial variables (namely, tax, wages, openness, exchange rate, tariffs, growth and trade balance) are highly sensitive to small alterations in the conditioning information set. The important question is Why do companies invest abroad? Dunning (1993) developed his theory by synthesizing the previously published theories, because existing explanations could not fully justify the existence of FDI. According to Dunning, international production is the result of a process affected by ownership, internalization and localization advantages. Dunnings so-called OLI paradigm states that FDI is undertaken if ownership-specic advantages (O) like proprietary technology exist together with location-specic advantages (L) in host countries, e.g. low factor costs, and potential benets from internalization (I) of the production process abroad (Frenkel et al., 2004). The latter is the most important: the factors based on which an investor selects a location for a project. These include the factors affecting the availability of local inputs such as natural resources, the size of the market, geographical location, the position of the economy, the cultural and political environment, factor prices, transport costs and certain elements of the economic policy of the government (trade policy, industrial policy, budget policy, tax policy, etc.). The main objective of this study is to dene the main FDI determinants that show the capital ows to developing countries in a globalization framework. The secondary objective of this study is to assign countries convergence by using the same FDI determinants. FDI ow is one of the main dynamics of globalization phenomenon thus FDI ow determinations will contribute to countries process of political development.

2. The determinants of FDI: theory and evidence FDI has been regarded in the last decades as an effective channel to transfer technology and foster growth in developing countries. This point of view vividly contrasts with the common belief that was accepted in some academic and political spheres in the 1950s and 1960s, according to which FDI was harmful for the economic performance of less developed countries. The theoretical discussion that permeated part of the development economics of the second half of the twentieth century has been approached from a new angle on the light of the New Growth Theory. Thus, the models built in this novel framework provide an interesting background in order to study the correlation between FDI and the growth rate of GDP (Calvo and Robles, 2003). In the neoclassical growth model technological progress and labor growth are exogenous, inward FDI merely increases the investment rate, leading to a transitional increase in per capita income growth but has no long-run growth effect (Hsiao and Hsiao, 2006). The new growth theory in the 1980s endogenizes technological progress and FDI has been considered to have permanent growth effect in the host country through technology transfer and spillover. There is ongoing discussion on the impact of FDI on a host country economy, as can be seen from recent surveys of the literature (De Mello, 1997, 1999; Fan, 2002; Lim, 2001). According to the neoclassical growth theory model, FDI does not affect the long-term growth rate. This is understandable if we consider the assumptions of the model, namely: constant economies of scale, decreasing marginal products of inputs, positive substitution elasticity of inputs and perfect competition (Sass, 2003). Within the framework of the neo-classical models (Solow, 1956), the impact of FDI on the growth rate of output was constrained by the existence of diminishing returns in the physical capital. Therefore, FDI could only exert a level effect on the output per capita, but not a rate effect. In other words, it was unable to alter the growth rate of output in the long run (Calvo and Robles, 2003). As a consequence, of endogenous growth theory, FDI has a newly-perceived potential role in the growth process (Bende-Nabende and Ford, 1998). In the context of the New Theory of Economic Growth, however, FDI may affect not only the level of output per capita but also its rate of growth. This literature has developed various hypotheses that explain why FDI may potentially enhance the growth rate of per capita income in the host country (Calvo and Robles, 2003). However, the endogenous growth theory, which dispenses with the assumption of perfect competition, leaves more scope for the impact of FDI on growth. In this theoretical framework, investment, including FDI, affects the rate of growth through research and development (R&D) or through its impact on human capital. Even if the return on investment is declining, FDI may inuence growth through externalities. These may include the knowledge leaking into the local economy through the subsidiary (organization forms, improvement of human capital, improvement of xed assets), as well as effects through the various contacts of the subsidiary with local companies (joint ventures, technical-technological links, technology transfer, orders, sale of intermediate products, market access, improved nancing conditions, more intense competition generated by the presence of the subsidiaries, etc.). These factors increase the productivity of the subsidiary and of the connecting companies in the host economy. Technology transfer and the local ripple effects prevent the decline of the marginal productivity of capital, thus facilitating longer term higher growth rates induced by

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endogenous factors. Thus, the existence of such externalities is one of the preconditions of the positive effect of FDI on the host economy (Sass, 2003). The various theoretical schools attribute different impacts to FDI on economic growth. On the other hand the literature examines a large number of variables that have been put forward to explain FDI. Some of these variables are encompassed in formal hypotheses or theories of FDI, whereas others are suggested because they make sense intuitively. Most of the studies reporting a signicantly negative coefcient on the labor cost (wage rate) combine the theory with the growth rate, ination and trade decit. Those reporting a positive coefcient combine wages with taxes and openness. The growth rate has been found to have a signicantly positive effect on FDI if it is combined with ination, trade decit and wages. Findlay (1978) postulated that FDI would promote economic growth through its effect on technological progress. Empirical studies such as those by Blomstrom et al. (1992) and Borensztein et al. (1998) found that FDI is positively correlated with economic growth. Empirical studies relating economic growth to capital formation have concluded that gross domestic investment (GDI) exerts a major inuence on economic growth. For instance, Levine and Renelt (1992) and De Long and Summers (1991) concluded that the rate of capital formation determines the rate of economic growth. On the other hand, Graham (1995) surveys the theoretical and empirical literature on the determinants of FDI and the economic consequences of FDI for both host (recipient) and home (investor) countries. The paper concludes that FDI can have both positive and negative economic effects on host countries. Positive effects come about largely through the transfer of technology and other intangible assets, leading to productivity increases and improvements in the efciency of resource allocation. Negative effects can arise from the market power of large foreign rms (multinational corporations) and their associated ability to generate very high prots or from domestic political interference by multinational corporations. However, empirical research suggests that the evidence of negative effects from FDI is inconclusive, while the evidence of positive effects is overwhelming. According to Sanjaya and Streeten (1977), FDI had a net positive effect on national economic welfare. The main determining factor of the remaining negative social income effects was the extent of effective protection granted rms. According to Sun (1998), FDI has signicantly promoted economic growth in China by contributing to domestic capital formation, increasing exports, and creating new employment. In addition, FDI ows to China have tended to improve the productive efciency of resource allocation of the Chinese domestic sectors by transferring technology, promoting exports, and facilitating inter-regional and intersectional ows of labor and capital. However, FDI ows to China have had also some negative side effects by: . Worsening of environmental pollution. . Exacerbating inter-regional economic disparities as a result of the uneven distribution of FDI. . Transfer pricing. . Encouraging round tripping of the capital of Chinese domestic rms recent literature has also raised concerns about the harmful effects of ows of capital on the recipient countries.

Particularly, FDI displaces domestic savings (Papanek, 1973; Cohen, 1993; Reinhart and Talvi, 1998). In a seminal paper, Papanek (1973) showed the signicant negative impacts of different types of capital on national savings. Based on a sample of 85 developing countries, Papanek found that foreign capital displaced domestic savings. Specically, he showed that foreign aid, private investment and other capital crowded out national savings, and a reduction in domestic savings could lead to further increase on the dependency on foreign capital (Baharumshah and Thanoon, 2006). Another determinant, tariffs, has a positive effect on FDI if they are combined with the growth rate and openness, but they produce a negative effect when combined with wages. The real exchange rate produces a positive effect when it is combined with openness, domestic investment and government consumption. When domestic investment is excluded, the effect becomes negative. This supports the argument that an efcient environment that comes with more openness to trade is likely to attract foreign rms. This conclusion is also supported by Asiedu (2002) and Edwards (1990). In this model, investment tax and wages have a negative impact on FDI, while infrastructure and market size have a signicantly positive impact on FDI. Generally, only in the case of export oriented FDI, cheap labor in terms of lower wages works as an incentive (Wheeler and Mody, 1992). On the other hand Tomiura (2003) study conrms that the positive association between FDI and R&D is robust even if rms undertaking no FDI and/or no R&D are included. In this respect, Morck and Yeung (1991) hypothesize and provide evidence that FDI creates wealth when an expanding rm possesses intangible assets, such as superior production and management skills, marketing expertise, patents and consumer goodwill. FDI determination effects in most of the studies can be seen from Table I. The UNCTADs classication of FDI determinants can be seen from Table II.

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3. Data denition The indicators tested in this study are selected on the basis of FDI theories and previous empirical literature. The indicators tested in the panel study and cross-section SUR, are the FDI determinants for which the data have been found for developing countries for at least 30 years. Data sets related to a number of developing countries are sometimes discontinuous for some variables (i.e. not available for all 30 years). For that reason while dening the main determinants of FDI in this study, 24 developing countries for which uninterrupted data sets for 30 years at some variables could be used Developing countries list is reported in the Appendix. Hence, the forecasts related to main determinants of FDI in this study were obtained under these constraints. At the same time, some variables referred as FDI determinants by UNCTAC and used in literature were used in the same sampling. These are:

3.1 Gross foreign direct investment (GFDI) The gross inows of investment to acquire a lasting management interest (10 percent or more of voting stock). A business enterprise operating in a country other than that of the investor. Data source: World Development Indicators (2007).

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Determinants of FDI Schmitz and Bieri (1972), Wheeler and Mody (1992)

Openness

Growth rates

Exchange rates

Tax factors (national and local tax rates; tax depreciation and tax credits at the national and at the local levels; tax holidays, dividend policy) and non-tax government incentives Budget decits Owen (1982), Gupta (1983), Lucas (1990), Sader (1993), Tsai (1994) Blonigen and Feenstra (1996)

Labor costs

Trade barriers

Gross domestic investment, gross capital formation and infrastructures Technology gap

Table I. The effects of FDI determination Non-effect Kravis and Lipsey (1982), Culem (1988), Edwards (1990), Pistoresi (2000), De Mello (1999) Tsai (1994) Lunn (1980), Schneider and Frey (1985), De Long and Summers (1991), Levine and Renelt (1992), Culem (1988), Blomstrom et al. (1992), Borensztein et al. (1998), Billington (1999), Lim (2001), Durham (2002), Chakraborty and Basu (2002) Blonigen (1997), Tuman and Emmert Caves (1989), Froot and Stein (1991), Edwards (1990) (1999) Blonigen and Feenstra (1996), Wheeler and Mody (1992), Jackson Hartman (1984), Grubert and Mutti Swenson (1994) (1991), Hines and Rice (1994), Loree and Markowski (1995), Yulin and and Guisinger (1995), Cassou (1997), Reed (1995) Devereux and Grifth (1998), Billington (1999), Desai et al. (2002) Culem (1988), Tsai (1994), Shamsuddin (1994) Caves (1974), Swedenborg (1979), Wheeler and Mody (1992) Schmitz and Bieri (1972), Lunn (1980) Sun (1998) Schneider and Frey (1985), Torrisi (1985), Lucas (1993), Hein (1992), Dollar (1992), Pistoresi (2000) Goldsbrough (1979), Flamm (1984), Culem (1988), Schneider and Frey (1985), Shamsuddin (1994), Pistoresi (2000) Culem (1988) Effects on FDI Negative effect Positive effect Blomstrom (1989) (continued)

Determinants of FDI

Non-effect

Effects on FDI Negative effect Positive effect

Economic Freedom

Market sizes

R&D (research and development) Drabek and Payne (1999), Kaufmann and Wei (1999), Wei (1999), Smarzynska and Wei (2000)

De Haan and Sturm (2000), Bengoa and Sanchez-Robles (2003) Bandera and White (1968), Swedenborg (1979), Rott and Ahmed (1979), Lunn (1980), Kravis and Lipsey (1982), Nigh (1985), Culem (1988), Pearce (1990), Wheeler and Mody (1992), Dunning (1993), Tsai (1994), Loree and Guisinger (1995), Shamsuddin (1994), Dees (1998), Billington (1999), Pistoresi (2000), Shatz and Venables (2000), Fung et al. (2000) Ueng and Ojah (1997), Tomiura (2003), Caves (1996)

Corruption

Human capital

Fosfuri et al. (2001), Glass and Saggi (2002)

Source: The table was developed by taking its one part from A. Chakrabarti (1998) study

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Table I.

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3.2 Electric power consumption (kwh per capita) (LOGELEC) Electric power consumption measures the production of power plants and combined heat and power plants, less distribution losses, and own use by heat and power plants. Electric is particularly important for efciency-seeking FDI. Data Source: World Development Indicators (2007). 3.3 Total external debt, total (DOD, current US$) (LOGEXDEBT) Total external debt is debt owed to nonresidents repayable in foreign currency, goods, or services. Data are in current US dollars. Data Source: World Development Indicators (2007). 3.4 Technology gap (TGAP) TGAP is the difference of technology level between two countries. The TGAP is measured by the following formula (Blomstrom (1989): GAPi;t y maxt 2 yi;t =yi;t ; where the GDP per capita of the Argentina is used as y maxi. 3.5 Total debt service (per cent of GDP) (TDSGDP) Total debt service is the sum of principal repayments and interest actually paid in foreign currency, goods, or services on long-term debt, interest paid on short-term debt, and repayments (repurchases and charges) to the IMF. Data Source: World Development Indicators (2007). 3.6 Ination, GDP deator (annual percent) (INFLATION) Ination as measured by the annual growth rate of the GDP implicit deator shows the rate of price change in the economy as a whole. The GDP implicit deator is the ratio of GDP in current local currency to GDP in constant local currency. Data Source: World Development Indicators (2007). 3.7 Domestic gross xed capital formation (as a percentage of GDP) (GFCF) Indicates capital stock in the host country and the availability of infrastructure. Data Source: World Development Indicators (2007). 1

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Determining variables Policy variables Business variables Market-related economic determinants Resource-related economic determinants Efciency-related economic determinants Source: UNCTAD (2006)

Table II. The UNCTADs classication of FDI determinants

Examples Tax policy, trade policy, privatization policy, macroeconomic policy Investment incentives Market size, market growth, market structure Raw materials, labor costs, labor productivity Transport and communication costs, labor productivity

3.8 Telephone mainlines (per 1,000 people) (TELEPHONE) Telephone mainlines are telephone lines connecting a customers equipment to the public switched telephone network. Data are presented per 1,000 people for the entire country. Data Source: World Development Indicators (2007). 3.9 Market size GDP per capita growth (annual per cent) (GDPpcgro) Annual percentage growth rate of GDP per capita based on constant local currency. GDP per capita is gross domestic product divided by midyear population. Data Source: World Development Indicators (2007). 3.10 Trade (per cent of GDP) (TRADE) Trade is the sum of exports and imports of goods and services measured as a share of gross domestic product. Data Source: World Development Indicators (2007). 3.11 Gross capital formation (annual per cent growth) (GCF) Annual growth rate of gross capital formation based on constant local currency. Aggregates are based on constant 2000 US dollars. Data Source: World Development Indicators (2007). 4. Methodology Panel data techniques has been used to estimate the FDI equations because of their advantages over cross-section and time series in using all the information available, which are not detectable in pure cross-sections or in pure time series[1]. In this study, the pool data (cross-section time series) has been created for 24 countries over 1975-2005 periods. T denotes the number of periods and N denotes the number of observations for each period. For making the evidence more reliable, ve basic models were set up for analyses. After reliable estimators were derived from SUR and fully modied OLS (FMOLS) models, b convergence model was dened; countries that capture less FDI are converging to countries capturing more FDI. 5. Empirical results 5.1 The FDI equation Panel data modeling applications have only been increasing over the past few years and there is no doubt that the range is going to expand further (Krishnakumar and Ronchetti, 2000). Panel data refers to the pooling of observations on a cross-section of countries, households, rms, etc. over a number of time periods. We use panel data techniques, for example, to control for individual heterogeneity or to study the dynamics of adjustment. Panel data allows for more informative results, more variability, more degrees of freedom and more efciency (De Kock, 2007, p. 1). With repeated observations of enough cross-sections, panel analysis permits the researcher to study the dynamics of change with short time series. The combination of time series with cross-sections can enhance the quality and quantity of data in ways that would be impossible using only one of these two dimensions (Gujarati, 1992, p. 638). Panel analysis can provide a rich and powerful study of a set of people, if one is willing to consider both the space and time dimension of the data.

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5.2 Unit root tests Before proceeding to estimate with panel data, we carry out unit root tests to examine whether the variables are stationary. These tests are the most widely used methods for panel data unit root tests in the literature. We performed: . Levin, Lin and Chu t, Levin, Lin and Chu (2002). . Im, Pesaran and Shin W-stat, Im, Pesaran and Shin (2003). . ADF Fisher x 2, PP Fisher x 2, Maddala and Wu (1999) and Choi (2001). . Hadri Z-stat, Hadri (2000). Unit root tests for stationarity are performed on both levels and rst differences for all the six variables in the model indicated in the preceding section. 5.3 The estimation results The results of panel estimating in its most general form are presented in Tables III and IV. Pooled EGLS SUR standard error results are reported in Table V. b Convergence xed effects results are reported in Table VI. Unit root test are reported in Tables VII and VIII. 6. Conclusion Competition among governments to attract FDI has grown signicantly. Many countries have not only reduced or eliminated such restrictions, but also moved toward encouraging FDI with tax and other incentives. Appropriate domestic policies will help attract FDI and maximize its benet, while at the same time removing obstacles to local businesses. Foreign enterprises, like domestic ones, pursue the good business environment rather than the special favors offered to induce the foreign enterprises to locate in the incentive offering regions, transparency and accountability of governments and corporations are fundamental conditions for providing a trustworthy and effective framework for the social, environmental, and economic life of their citizens. They bring huge domestic governance challenges not only for the benet of foreign investors, but also for domestic business and society at large as well. When evaluating the two main model groups, namely the rst model group including Models I, II, and III, and the second model group including Models IV and V, developed by us according to the literature related to FDI determinants, we see that their results are parallel. Thus, according to the forecasters of the second expanded model group it could be more reliable to forecast and develop policy suggestions. In Models IV and V, the interaction of FDI with some FDI determinants has a strong positive effect on development in developing countries, while that of FDI with the total debt service/GDP and ination have a signicant negative impact. On the other side, trade, telephone, gross capital formation, and GDP per capita growth have positive effect on FDI. However, the best FDI determinant is communication (telephone mainlines) and it has strong positive effect on FDI. In addition, we did b convergence to see the catch-up process using same equation. Thus, parameters of b convergence for the 24 countries are in agreement with each

Dependent variable Method Variables

GFDI Pooled EGLS (cross-section SUR) Model I

GFDI FMOLS Model II

DGFDI b Convergence Model III

20.000206 2.860844 20.712970 20.693610 0.029274 0.953791 0.953533 1.002901 1.875783 1.237811 4.652468 719.1541 0.000000 0.155132 2667.915 1.955563 0.595316 0.314748 3213.391 1.542777 1.846325 0.973126 0.971996 1.016882 861.5484 1.518549 6.076598 713.4938 2.034451 0.000000

C LBGFDI INFLATION LOGELEC TGAP LOGEXDEBT GFCF Weighted statistics R2 Adjusted R 2 SE of regression F-statistic Mean dependent var. SD dependent var. Sum squared resid. Durbin-Watson stat. Prob (F-statistic) Unweighted statistics R2 Sum squared resid. Mean dependent var. Durbin-Watson stat. Panel statistics Panel v-stat. Panel rho-stat. Panel pp-stat. Panel adf-stat. Group rho-stat. Group pp-stat. Group adf-stat. Periods (25.615574) (75.89490) (216.51651) (256.62329) (17.38017) 2 0.000032 4.182541 2 6.576343 2 1.450318 0.057353 (26.333433e 03) (0.078989) (24.010157) (1.225685) (263.015690) 27.707627 23.197495 20.000219 4.888058 24.523906 20.734537 0.030418 N 24, T 30 0.15966 0.02555 2 8.62330 2 6.23357 1.76070 2 11.76444 2 7.59305 N 24, T 23 N 24, T 30

(2 18.49878) (2 72.95220) (2 9.295649) (40.71576) (2 22.82603) (2 12.58019) (16.60452)

Note: t-statistics in parentheses

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Table III. Estimation results (rst model group)

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Dependent variable Method Variables INFLATION LTELEPHONE GCF TDSGDP TRADE GDPPCGRO Weighted statistics R2 Adjusted R 2 SE of regression Mean dependent var. SD dependent var. Sum squared resid. Durbin-Watson stat. Unweighted statistics R2 Sum squared resid. Mean dependent var. Durbin-Watson stat. Periods

GFDI Pooled EGLS (cross-section SUR) Model IV 2 0.000125 0.012599 0.008344 2 0.004428 0.016691 0.002721 0.928417 0.927916 1.002957 1.163867 4.943927 718.2290 1.812542 0.774862 2258.920 1.890734 0.662822 N 24, T 30 (26.264648) 0.0000 (53.91920) 0.0000 (16.17362) 0.0000 (21.784010) 0.0748 (51.69897) 0.0000 (1.509252) 0.1317

GFDI FMOLS Model V 2 0.01 (22.39e 03) 2.88 (2.28) 0.03 (89.77) 2 0.08 (2 64.25) 0.01 (169.09) 0.00 (1.82e 11) Panel statistics Panel v-stat. 23.326071 Panel rho-stat. 4.203005 Panel pp-stat. 2 6.353022 Panel adf-stat. 22.904839 Group rho-stat. 4.712018 Group pp-stat. 212.03339 Group adf-stat. 2 2.115461

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Table IV. Estimation results (second model group)

N 24, T 30

Note: t-statistics in parentheses

Variable Table V. Pooled EGLS (cross-section SUR) standard error INFLATION LOGELEC TGAP LOGEXDEBT GFCF

Standard error 3.67E-05 0.037695 0.043167 0.012250 0.001684

Fixed effects (cross) _ARG C _BOLI C _BRA C _CHIL C _COL C _COS C _DOM C _ECU C _EGY C _ELSA C _INDIA C _ JORD C 1.387440 1.160332 2 0.336461 0.596849 0.311010 2 0.005836 1.036318 0.151749 2 0.508506 0.225043 2 1.197840 2 0.898742

Fixed effects (cross) _MALA C _MEXIC C _MORO C _PAKIS C _PARA C _PHILIP C _SRILA C _THAIL C _TUNU C _TURK C _URU C _VEN C 0.283992 0.762962 0.279814 2 0.632061 2 0.500683 1.328027 1.823186 2 0.391661 0.166280 2 2.060049 2 1.348913 2 1.632250

Table VI. b Convergence xed effects (cross)

Variables GFDI

Pool unit root tests Levin, Lin and m, Pas, Shin I ADF Fisher PP Fisher Hadri Levin, Lin and m, Pas, Shin I ADF Fisher PP Fisher Hadri Levin, Lin and m, Pas, Shin I ADF Fisher PP Fisher Hadri Levin, Lin and m, Pas, Shin I ADF Fisher PP Fisher Hadri Levin, Lin and m, Pas, Shin I ADF Fisher PP Fisher Hadri Levin, Lin and m, Pas, Shin I ADF Fisher PP Fisher Hadri Chu

Individual intercept Level First differences Statistic Probability Statistic Probability 2.22961 0.75804 63.454 104.319 11.3404 0.47228 27.94431 163.723 203.674 20.34771 27.84248 22.44188 91.5570 141.913 17.2276 21.13212 21.27903 52.1272 51.4860 14.4478 217.8573 215.2460 264.821 350.606 15.7603 21.73604 25.51316 109.457 69.1233 5.78336 0.9871 0.7758 0.0667 0.0000 0.0000 0.6816 0.0000 0.0000 0.0000 0.6360 0.0000 0.0073 0.0002 0.0000 0.0000 0.1288 0.1004 0.2478 0.2678 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0413 0.0000 0.0000 0.0245 0.0000 2 10.2374 2 17.1986 366.414 567.737 2 0.97013 2 15.1518 2 21.7625 447.260 618.190 9.42924 2 8.65500 2 11.6970 233.313 330.080 5.50141 2 11.4426 2 17.4173 339.850 369.648 0.23963 2 5.85490 2 8.06550 159.688 169.643 8.11807 2 7.73516 2 15.5416 311.182 425.409 2 1.42021 0.0000 0.0000 0.0000 0.0000 0.8340 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.4053 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.9222

Analyses of FDI determinants

117

INFLATION

Chu

LOGELEC

Chu

TGAP

Chu

LOGEXDEBT

Chu

GFCF

Chu

Notes: Automatic selection of lags based on AIC: 0 to 6; Andrews bandwidth selection using Bartlett kernel

Table VII. Pool unit root test: summary

other, indicating that the model is meaningful. With reference to the countries which are capturing less FDI convergence more attractive ones in this period. In the study the main determinants of FDI have been identied. It is possible for the countries to develop policies particular to their own economic structure by looking at the main FDI determinants. For example,; when looking at the Gross Capital Formation indicator in country X, we can conclude that this country can develop policies to encourage the import of investment goods instead of the import of consumption goods. Again country Y can improve intra trade policies by taking the Openness indicator into account. Or by taking the Total Debt Service-GDP ratio indicator into account, country Z can develop policies related to utilization of resources provided from external debt in productive elds in order to cover the countrys capital inadequacy. So, the role of FDI in country growth can be expressed by the effects of each of the determinants or by the effects of all determinants together. In this way, the role of FDI at the country growth can be used effectively.

IJSE 36,1/2
Variables LTELEPHONE Pool unit root tests Levin,Lin and Chu m, Pas, Shin I ADF Fisher PP Fisher Hadri Levin, Lin and Chu m, Pas, Shin I ADF Fisher PP Fisher Hadri Levin, Lin and Chu m, Pas, Shin I ADF Fisher PP Fisher Hadri Levin, Lin and Chu m, Pas, Shin I ADF Fisher PP Fisher Hadri Levin, Lin and Chu m, Pas, Shin I ADF Fisher PP Fisher Hadri

Individual intercept Level First Differences Statistic Probability Statistic Probability 21.92948 5.58486 26.9113 10.0068 16.9076 22.60740 23.69092 45.2015 36.9895 14.3171 20.77120 21.63092 57.1276 72.0999 5.33144 1.33617 1.61081 43.9231 46.8862 14.4181 6.63151 10.3896 8.33878 8.44645 17.3198 0.0268 1.0000 0.9940 1.0000 0.0000 0.0046 0.0025 0.5882 0.8757 0.0000 0.2203 0.0515 0.1722 0.0138 0.0000 0.9093 0.9464 0.6405 0.5185 0.0000 1.0000 1.0000 1.0000 1.0000 0.0000 2 1.46510 2 4.03758 89.1983 176.875 3.44684 220.8551 242.2439 454.050 748.048 2 0.11248 2 2.94295 212.2539 239.230 483.140 2 0.73427 211.0613 212.3913 240.044 443.305 2 0.21258 2 6.64609 2 8.19666 161.425 274.171 3.59123 0.0714 0.0000 0.0003 0.0000 0.0003 0.0000 0.0000 0.0000 0.0000 0.5342 0.0016 0.0000 0.0000 0.0000 0.7686 0.0000 0.0000 0.0000 0.0000 0.5842 0.0000 0.0000 0.0000 0.0000 0.0002

118
GCF

TDSGDP

TRADE

GDPPCGRO Table VIII. Pool unit root test: summary

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1 2 3 4 5 6 7 8 9 10 11 12

Argentina Bolivia Brazil Chile Colombia Costa rica Dominican republic Ecuador Egypt El Salvador India Jordan

13 14 15 16 17 18 19 20 21 22 23 24

Malaysia Mexico Morocco Pakistan Paraguay Philippines Sri lanka Thailand Tunisia Turkiye Uruguay Venezuela

Table AI. Developing countries list

Corresponding author Bernur Acikgoz Ersoy can be contacted at: bernur@gmail.com

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