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International Journal of Social Economics

Analyses of FDI determinants in developing countries

Recep Kok, Bernur Acikgoz Ersoy,
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Analyses of FDI
Analyses of FDI determinants determinants
in developing countries
Recep Kok
Economics Department, Dokuz Eylul University, Izmir, Turkey, and 105
Bernur Acikgoz Ersoy
School of Applied Science, Celal Bayar University, Manisa, Turkey
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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 modified 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 inflation 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 define the main FDI determinants that
show the capital flows 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 flow is one
of the main dynamics of globalization phenomenon thus FDI flow 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 significant channels for the dissemination of modern technology
(Blomstrom, 1989). International Journal of Social
FDI has innumerable other effects on the host country’s economy. It influences the Economics
Vol. 36 Nos 1/2, 2009
income, production, prices, employment, economic growth, development and general pp. 105-123
q Emerald Group Publishing Limited
JEL classification – F21, F47 DOI 10.1108/03068290910921226
IJSE welfare of the recipient country. It is also probably one of the most significant factors
36,1/2 leading to the globalization of the international economy. Thus, the enormous increase
in FDI flows 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 efficient
106 transfer and adoption of “best practice” across borders.
On the other hand, in general, foreign investors are influenced by three broad
groups of factors:
(1) The profitability of the projects.
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(2) The ease with which subsidiaries’ operations can be integrated into investors’
global strategies.
(3) The overall quality of the host country’s 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. Dunning’s so-called OLI paradigm states
that FDI is undertaken if ownership-specific advantages (“O”) like proprietary
technology exist together with location-specific advantages (“L”) in host countries, e.g.
low factor costs, and potential benefits 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 define the main FDI determinants that show
the capital flows 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 flow is one of the main dynamics of globalization phenomenon thus
FDI flow determinations will contribute to countries’ process of political development.
2. The determinants of FDI: theory and evidence Analyses of FDI
FDI has been regarded in the last decades as an effective channel to transfer determinants
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 107
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).
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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 influence growth through externalities. These may include the knowledge
“leaking” into the local economy through the subsidiary (organization forms,
improvement of human capital, improvement of fixed 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 financing 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
IJSE endogenous factors. Thus, the existence of such externalities is one of the preconditions
36,1/2 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
108 sense intuitively. Most of the studies reporting a significantly negative coefficient on
the labor cost (wage rate) combine the theory with the growth rate, inflation and trade
deficit. Those reporting a positive coefficient combine wages with taxes and openness.
The growth rate has been found to have a significantly positive effect on FDI if it is
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combined with inflation, trade deficit 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 influence 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
efficiency of resource allocation. Negative effects can arise from the market power of
large foreign firms (multinational corporations) and their associated ability to generate
very high profits 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 firms. According to Sun
(1998), FDI has significantly promoted economic growth in China by contributing to
domestic capital formation, increasing exports, and creating new employment. In
addition, FDI flows to China have tended to improve the productive efficiency of
resource allocation of the Chinese domestic sectors by transferring technology,
promoting exports, and facilitating inter-regional and intersectional flows of labor and
capital. However, FDI flows 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 firms recent
literature has also raised concerns about the harmful effects of flows of capital on
the recipient countries.
Particularly, FDI displaces domestic savings (Papanek, 1973; Cohen, 1993; Reinhart Analyses of FDI
and Talvi, 1998). In a seminal paper, Papanek (1973) showed the significant negative determinants
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.
Specifically, 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). 109
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
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openness, domestic investment and government consumption. When domestic

investment is excluded, the effect becomes negative.
This supports the argument that an efficient environment that comes with more
openness to trade is likely to attract foreign firms. 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 significantly
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 confirms that the positive association between FDI and
R&D is robust even if firms 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 firm possesses intangible assets, such as superior
production and management skills, marketing expertise, patents and consumer
FDI determination effects in most of the studies can be seen from Table I.
The UNCTAD’s classification of FDI determinants can be seen from Table II.

3. Data definition
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 defining 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 inflows 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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Table I.

The effects of FDI
Effects on FDI
Determinants of FDI Non-effect Negative effect Positive effect

Openness Schmitz and Bieri (1972), Wheeler Kravis and Lipsey (1982), Culem
and Mody (1992) (1988), Edwards (1990), Pistoresi
(2000), De Mello (1999)
Growth rates 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)
Exchange rates Blonigen (1997), Tuman and Emmert Caves (1989), Froot and Stein (1991), Edwards (1990)
(1999) Blonigen and Feenstra (1996),
Tax factors (national and local tax Wheeler and Mody (1992), Jackson Hartman (1984), Grubert and Mutti Swenson (1994)
rates; tax depreciation and tax and Markowski (1995), Yulin and (1991), Hines and Rice (1994), Loree
credits at the national and at the Reed (1995) and Guisinger (1995), Cassou (1997),
local levels; tax holidays, dividend Devereux and Griffith (1998),
policy) and non-tax government Billington (1999), Desai et al. (2002)
Budget deficits Schneider and Frey (1985), Torrisi Culem (1988), Tsai (1994),
(1985), Lucas (1993), Hein (1992), Shamsuddin (1994)
Dollar (1992), Pistoresi (2000)
Labor costs Owen (1982), Gupta (1983), Lucas Goldsbrough (1979), Flamm (1984), Caves (1974), Swedenborg (1979),
(1990), Sader (1993), Tsai (1994) Culem (1988), Schneider and Frey Wheeler and Mody (1992)
(1985), Shamsuddin (1994), Pistoresi
Trade barriers Blonigen and Feenstra (1996) Culem (1988) Schmitz and Bieri (1972), Lunn
Gross domestic investment, gross Sun (1998)
capital formation and infrastructures
Technology gap Blomstrom (1989)
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Effects on FDI
Determinants of FDI Non-effect Negative effect Positive effect

Economic Freedom De Haan and Sturm (2000), Bengoa

and Sanchez-Robles (2003)
Market sizes 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)
R&D (research and development) Ueng and Ojah (1997), Tomiura
(2003), Caves (1996)
Corruption Drabek and Payne (1999), Kaufmann
and Wei (1999), Wei (1999),
Smarzynska and Wei (2000)
Human capital Fosfuri et al. (2001), Glass and Saggi
Source: The table was developed by taking its one part from A. Chakrabarti (1998) study
Analyses of FDI


Table I.
IJSE 3.2 Electric power consumption (kwh per capita) (LOGELEC)
36,1/2 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 efficiency-seeking FDI. Data Source: World
Development Indicators (2007).

112 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).
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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 ¼ ð y maxt 2 yi;t Þ=yi;t ; ð1Þ

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 Inflation, GDP deflator (annual percent) (INFLATION)

Inflation as measured by the annual growth rate of the GDP implicit deflator shows the
rate of price change in the economy as a whole. The GDP implicit deflator 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 fixed 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).

Determining variables Examples

Policy variables Tax policy, trade policy, privatization policy,
macroeconomic policy
Business variables Investment incentives
Market-related economic determinants Market size, market growth, market structure
Resource-related economic determinants Raw materials, labor costs, labor productivity
Table II. Efficiency-related economic determinants Transport and communication costs, labor
The UNCTAD’s productivity
classification of FDI
determinants Source: UNCTAD (2006)
3.8 Telephone mainlines (per 1,000 people) (TELEPHONE) Analyses of FDI
Telephone mainlines are telephone lines connecting a customer’s equipment to the determinants
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. 113
GDP per capita is gross domestic product divided by midyear population. Data Source:
World Development Indicators (2007).
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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, five
basic models were set up for analyses. After reliable estimators were derived from SUR
and fully modified OLS (FMOLS) models, b convergence model was defined; 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, firms, 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 efficiency (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.
IJSE 5.2 Unit root tests
36,1/2 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).
114 .
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).
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Unit root tests for stationarity are performed on both levels and first 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
fixed 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 significantly. 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 benefit, 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 benefit of foreign investors, but also for
domestic business and society at large as well.
When evaluating the two main model groups, namely the first 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 inflation have a significant 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
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Dependent variable GFDI GFDI DGFDI

Method Pooled EGLS (cross-section SUR) FMOLS b Convergence
Variables Model I Model II Model III
C 27.707627 (2 18.49878)
LBGFDI 23.197495 (2 72.95220)
INFLATION 20.000206 (25.615574) 2 0.000032 (26.333433e þ 03) 20.000219 (2 9.295649)
LOGELEC 2.860844 (75.89490) 4.182541 (0.078989) 4.888058 (40.71576)
TGAP 20.712970 (216.51651) 2 6.576343 (24.010157) 24.523906 (2 22.82603)
LOGEXDEBT 20.693610 (256.62329) 2 1.450318 (1.225685) 20.734537 (2 12.58019)
GFCF 0.029274 (17.38017) 0.057353 (263.015690) 0.030418 (16.60452)
Weighted statistics
R2 0.953791 0.973126
Adjusted R 2 0.953533 0.971996
SE of regression 1.002901 1.016882
F-statistic 861.5484
Mean dependent var. 1.875783 1.518549
SD dependent var. 1.237811 6.076598
Sum squared resid. 4.652468 713.4938
Durbin-Watson stat. 719.1541 2.034451
Prob (F-statistic) 0.000000 0.000000
Unweighted statistics
R2 0.155132 0.314748
Sum squared resid. 2667.915 3213.391
Mean dependent var. 1.955563 1.542777
Durbin-Watson stat. 0.595316 1.846325
Panel statistics
Panel v-stat. 0.15966
Panel rho-stat. 0.02555
Panel pp-stat. 2 8.62330
Panel adf-stat. 2 6.23357
Group rho-stat. 1.76070
Group pp-stat. 2 11.76444
Group adf-stat. 2 7.59305
Periods N ¼ 24, T ¼ 30 N ¼ 24, T ¼ 23 N ¼ 24, T ¼ 30
Note: t-statistics in parentheses

Estimation results
(first model group)
Analyses of FDI

Table III.
Dependent variable GFDI GFDI
36,1/2 Method Pooled EGLS (cross-section SUR) FMOLS
Variables Model IV Model V

INFLATION 2 0.000125 (26.264648) 0.0000 2 0.01 (22.39e þ 03)

LTELEPHONE 0.012599 (53.91920) 0.0000 2.88 (2.28)
116 GCF 0.008344 (16.17362) 0.0000 0.03 (89.77)
TDSGDP 2 0.004428 (21.784010) 0.0748 2 0.08 (2 64.25)
TRADE 0.016691 (51.69897) 0.0000 0.01 (169.09)
GDPPCGRO 0.002721 (1.509252) 0.1317 0.00 (1.82e þ 11)
Weighted statistics Panel statistics
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R2 0.928417 Panel v-stat. 23.326071

Adjusted R 2 0.927916 Panel rho-stat. 4.203005
SE of regression 1.002957 Panel pp-stat. 2 6.353022
Mean dependent var. 1.163867 Panel adf-stat. 22.904839
SD dependent var. 4.943927 Group rho-stat. 4.712018
Sum squared resid. 718.2290 Group pp-stat. 212.03339
Durbin-Watson stat. 1.812542 Group adf-stat. 2 2.115461
Unweighted statistics
R2 0.774862
Sum squared resid. 2258.920
Mean dependent var. 1.890734
Durbin-Watson stat. 0.662822
Table IV. Periods N ¼ 24, T ¼ 30 N ¼ 24, T ¼ 30
Estimation results
(second model group) Note: t-statistics in parentheses

Variable Standard error

Table V. LOGELEC 0.037695
Pooled EGLS TGAP 0.043167
(cross-section SUR) LOGEXDEBT 0.012250
standard error GFCF 0.001684

Fixed effects (cross) Fixed effects (cross)

_ARG – C 1.387440 _MALA– C 0.283992

_BOLI– C 1.160332 _MEXIC – C 0.762962
_BRA– C 2 0.336461 _MORO– C 0.279814
_CHIL –C 0.596849 _PAKIS– C 2 0.632061
_COL – C 0.311010 _PARA –C 2 0.500683
_COS – C 2 0.005836 _PHILIP – C 1.328027
_DOM– C 1.036318 _SRILA – C 1.823186
_ECU –C 0.151749 _THAIL – C 2 0.391661
_EGY– C 2 0.508506 _TUNU –C 0.166280
Table VI. _ELSA – C 0.225043 _TURK –C 2 2.060049
b Convergence fixed _INDIA – C 2 1.197840 _URU– C 2 1.348913
effects (cross) _ JORD– C 2 0.898742 _VEN– C 2 1.632250
Analyses of FDI
Individual intercept
Level First differences determinants
Variables Pool unit root tests Statistic Probability Statistic Probability

GFDI Levin, Lin and Chu 2.22961 0.9871 2 10.2374 0.0000

İm, Pas, Shin 0.75804 0.7758 2 17.1986 0.0000
ADF Fisher 63.454 0.0667 366.414 0.0000 117
PP Fisher 104.319 0.0000 567.737 0.0000
Hadri 11.3404 0.0000 2 0.97013 0.8340
INFLATION Levin, Lin and Chu 0.47228 0.6816 2 15.1518 0.0000
İm, Pas, Shin 27.94431 0.0000 2 21.7625 0.0000
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ADF Fisher 163.723 0.0000 447.260 0.0000

PP Fisher 203.674 0.0000 618.190 0.0000
Hadri 20.34771 0.6360 9.42924 0.0000
LOGELEC Levin, Lin and Chu 27.84248 0.0000 2 8.65500 0.0000
İm, Pas, Shin 22.44188 0.0073 2 11.6970 0.0000
ADF Fisher 91.5570 0.0002 233.313 0.0000
PP Fisher 141.913 0.0000 330.080 0.0000
Hadri 17.2276 0.0000 5.50141 0.0000
TGAP Levin, Lin and Chu 21.13212 0.1288 2 11.4426 0.0000
İm, Pas, Shin 21.27903 0.1004 2 17.4173 0.0000
ADF Fisher 52.1272 0.2478 339.850 0.0000
PP Fisher 51.4860 0.2678 369.648 0.0000
Hadri 14.4478 0.0000 0.23963 0.4053
LOGEXDEBT Levin, Lin and Chu 217.8573 0.0000 2 5.85490 0.0000
İm, Pas, Shin 215.2460 0.0000 2 8.06550 0.0000
ADF Fisher 264.821 0.0000 159.688 0.0000
PP Fisher 350.606 0.0000 169.643 0.0000
Hadri 15.7603 0.0000 8.11807 0.0000
GFCF Levin, Lin and Chu 21.73604 0.0413 2 7.73516 0.0000
İm, Pas, Shin 25.51316 0.0000 2 15.5416 0.0000
ADF Fisher 109.457 0.0000 311.182 0.0000
PP Fisher 69.1233 0.0245 425.409 0.0000
Hadri 5.78336 0.0000 2 1.42021 0.9222
Table VII.
Notes: Automatic selection of lags based on AIC: 0 to 6; Andrews bandwidth selection using Pool unit root test:
Bartlett kernel 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 identified. 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 fields in order to cover the country’s 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.
Individual intercept
36,1/2 Level First Differences
Variables Pool unit root tests Statistic Probability Statistic Probability

LTELEPHONE Levin,Lin and Chu 21.92948 0.0268 2 1.46510 0.0714

İm, Pas, Shin 5.58486 1.0000 2 4.03758 0.0000
118 ADF Fisher 26.9113 0.9940 89.1983 0.0003
PP Fisher 10.0068 1.0000 176.875 0.0000
Hadri 16.9076 0.0000 3.44684 0.0003
GCF Levin, Lin and Chu 22.60740 0.0046 220.8551 0.0000
İm, Pas, Shin 23.69092 0.0025 242.2439 0.0000
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ADF Fisher 45.2015 0.5882 454.050 0.0000

PP Fisher 36.9895 0.8757 748.048 0.0000
Hadri 14.3171 0.0000 2 0.11248 0.5342
TDSGDP Levin, Lin and Chu 20.77120 0.2203 2 2.94295 0.0016
İm, Pas, Shin 21.63092 0.0515 212.2539 0.0000
ADF Fisher 57.1276 0.1722 239.230 0.0000
PP Fisher 72.0999 0.0138 483.140 0.0000
Hadri 5.33144 0.0000 2 0.73427 0.7686
TRADE Levin, Lin and Chu 1.33617 0.9093 211.0613 0.0000
İm, Pas, Shin 1.61081 0.9464 212.3913 0.0000
ADF Fisher 43.9231 0.6405 240.044 0.0000
PP Fisher 46.8862 0.5185 443.305 0.0000
Hadri 14.4181 0.0000 2 0.21258 0.5842
GDPPCGRO Levin, Lin and Chu 6.63151 1.0000 2 6.64609 0.0000
İm, Pas, Shin 10.3896 1.0000 2 8.19666 0.0000
Table VIII. ADF Fisher 8.33878 1.0000 161.425 0.0000
Pool unit root test: PP Fisher 8.44645 1.0000 274.171 0.0000
summary Hadri 17.3198 0.0000 3.59123 0.0002

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1 Argentina 13 Malaysia
2 Bolivia 14 Mexico
3 Brazil 15 Morocco
4 Chile 16 Pakistan
5 Colombia 17 Paraguay
6 Costa rica 18 Philippines
7 Dominican republic 19 Sri lanka
8 Ecuador 20 Thailand
9 Egypt 21 Tunisia
10 El Salvador 22 Turkiye
11 India 23 Uruguay Table AI.
12 Jordan 24 Venezuela Developing countries list

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