Estimating the Determinants of Foreign Direct Investment Inflows: How Important are Sampling and Omitted Variable Biases?

40 Pages Posted: 18 Sep 2007

See all articles by Yuko Kinoshita

Yuko Kinoshita

International Monetary Fund (IMF); University of Michigan, William Davidson Institute; Centre for Economic Policy Research (CEPR)

Nauro F. Campos

University College London; University of Michigan at Ann Arbor - The William Davidson Institute; IZA Institute of Labor Economics

Date Written: June 16, 2004

Abstract

This paper investigates the importance of factor endowment vis-à-vis institutions in explaining the locational choice of foreign investors during the 1990s. Using dynamic panel estimation on data for transition economies, we find that low labour costs, bureaucratic efficiency ("institutions"), agglomeration economies and natural resource abundance are key factors explaining foreign investors' decisions. However, sampling proves fundamental as these overall determinants mask deep and, so far empirically unexplored, differences between groups of recipient countries. For example, for the former Soviet Union economies we estimate that labour costs are no longer crucial, but abundance of natural resources and (interestingly) lower levels of human capital are. For Eastern Europe, we find that external liberalisation (one aspect of economic reform) is crucial in foreign investor's decisions. The main message is that minimising sampling biases and accounting for previously omitted variables yields a different, much richer picture than previously available.

Keywords: foreign direct investment, dynamic panel estimation, transition economies

JEL Classification: F21, O16, C33, P27

Suggested Citation

Kinoshita, Yuko and Campos, Nauro F., Estimating the Determinants of Foreign Direct Investment Inflows: How Important are Sampling and Omitted Variable Biases? (June 16, 2004). Available at SSRN: https://ssrn.com/abstract=1015209 or http://dx.doi.org/10.2139/ssrn.1015209

Yuko Kinoshita (Contact Author)

International Monetary Fund (IMF) ( email )

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University of Michigan, William Davidson Institute

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Centre for Economic Policy Research (CEPR)

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Nauro F. Campos

University College London ( email )

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London, WC1E 6BT
United Kingdom

University of Michigan at Ann Arbor - The William Davidson Institute

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Wyly Hall
Ann Arbor, MI 48109-1234
United States

IZA Institute of Labor Economics

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Bonn, D-53072
Germany

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