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The Determinants of Foreign Direct Investment: Sensitivity Analyses of Cross-Country Regressions

Avik Chakrabarti ()

Kyklos, 2001, vol. 54, issue 1, 89-113

Abstract: A vast empirical literature has used ad hoc linear cross-country regressions to search for the determinants of FDI. The literature is extensive and controversial. Can policy-makers use this body of research to learn anything that can help them stimulate FDI? In this paper I use Extreme Bound Analysis (EBA) to examine if any of the conclusions from the existing studies is robust to small changes in the conditioning information set. The EBA upholds the robustness of the correlation between FDI and market-size, as measured by per-capita GDP, but indicates that the relations between FDI and many of the controversial variables (namely, tax, wage, openness, exchange rate, tariff, growth, and trade balance) are highly sensitive to small alterations in the conditioning information set. I also study the distribution of the estimated coefficients of the controversial explanatory variables to rank them in order of the likelihood of their being correlated with FDI. Copyright 2001 by WWZ and Helbing & Lichtenhahn Verlag AG

Date: 2001
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