Variation of foreign direct investments in global environment.

Jerzy R. Różański 1Paweł Sekuła 2

1. University of Lodz, Faculty of Management, Department of Finance and Strategic Management, Łódź 90-237, Poland
2. University of Lodz, Łódź 90-255, Poland

Abstract

The purpose of this article is to identify factors that increase the scale of foreign direct investments in the host countries, taking into account not only the most important macroeconomic measurable indictors achieved by the host country but also an immeasurable factors that can be evaluated using a point system of evaluation.

If is also about determining the difference between the motivating factors for investing in the markets of developed countries and the factors that encourage investment in developing countries (emerging markets) often with high growth potential.

The research methods - mean, median, standard deviation, least square method, Breusch-Pagan test, Hausman test.

The relation between variables can be studied by using the OLS – ordinary least squares method, however, on condition that there are no individual effects. As a result the research procedure was conducted in three stages. At first, by using Breusch-Pagan test, it was checked whether the individual effects should be introduced. If there is no reason to reject the zero hypothesis it was assumed that the model could be estimated by using the ordinary least squares method when the test value was high (LM multiplier) the zero hypothesis was rejected for the alternative hypothesis and individual effects were introduced. In the next stage the Hausman test was carried out to choose fixed or random effects. The high value of Hausman test indicated a fixed-effect model while the low value – the random – effect model.

Eleven independent variables were used in the research. Four of them represented the impact of macroeconomic factors on the FDI level: effective exchange rate, GDP growth, GDP per capita, inflation. The country size was characterized by one variable – the FDI – population. Six variables characterized the organization quality and countries functioning and were represented by the worldwide governance indicators: voice and accountability, political stability & absence of violence /terrorism, government effectiveness, regulatory quality, rule of law, control of corruption.

Effective exchange rate (EER) - in the research the data published by Bank for International Settlements (BIS) were used. EERsare calculated as a geometric weighted average of bilateral exchange rates, adjusted by the consumer price index(CPI). The influence of the effective exchange rate on the level of FDI is ambiguous. On the one hand, the depreciation of the host country currency encourages buyers of assets in the host country. On the other hand, the strengthening of the -domestic currency increases the purchasing power which may also have a beneficial effect.

GDP growth(GDPGR) —is based on data published by the International Monetary Fund (IMF). They arc annual percentage changes in gross domestic product at constant prices. GDP per capita (GDPPC) - in this case the International Monetary Fund(IMF) statistics arc also used. Gross domestic product per capita is given in current prices in U.S. dollars.

In the research it is assumed that GDP growth and GDP per capita arc the variables constituting the economic potential of the host country and should be positively correlated with the level of FDI inflows.

Inflation(INF) - based on data published by the International Monetary Fund(IMF) that represented an annual index of consumer prices. In the research it is assumed that there relatively high rate of inflation that continued for several years, can point to macroeconomic instability, which could have a negative impact on FDJ.

Population (POP) -based on data published by the International Monetary Fund(IMF). It is assumed that the host country population characterizes host country size and its potential and should have a positive impact on FDI.

The institutional variables were represented by the world wide governance indicators(WGI) published by the World Bank. WGI consist of six aggregated indicators and evaluate various aspects of the state functioning and are formed on the basis of the views of enterprises, citizens and experts in the surveyed countries. WGI used in the analysis reported the range from -2.5 to2.5 points - higher values correspond to the higher quality of state functioning.

Voice and accountability(VAA)- the index represents the quality of democracy and citizens" ability to influence governments, freedom of association, speech and media.

Political stabiłity8 absence of violence/terrorism(PSAVT) - index measures the stability of the government and the probability of government destabilizing by means of violence. Government Effectiveness(GB)- the mdcx measures the quality of infrastructure, quality of civil service of the state and its independence from political pressures.

Regulatory quality (RQ) - index assesses the government ability to conduct policies supporting and promoting private sector development.

Rule of law (ROL) - the index represents an assessment of the police and judiciary level, respect of property rights and governance and the level of crime.

Control of Corruption (CoC) - the index assesses the corruption level of corruption in different areas of country" s operation.

It this research it is, assumed that the WGI increase, providing a higher quality of country functioning, should have a positive impaction the volume of MI inflows.

The research sample - 26 developed countries and 25 developing countries, period 15 years.

The research finding confirmed the positive impact of variables describing the dynamic and trends of economic growth on FDI. The market size and the institutional variables, characterizing the quality of the organization and country functioning were also an important determinant of FDI inflows.

The research results, related to the impact of institutional variables on FDI, proved to be rather ambiguous.

The paper presents the comparison of the FDI determinants in the group of developed and emerging markets countries. The results prove that, although a number of differences in the characteristics between these groups of countries, FDI are affected by a wide range of the same variables significantly. This could indicate that the criteria selection of locating FDI can be very similar for both developed countries and emerging markets.

 

Presentation: Oral at Current Economic and Social Topics 2015, by Jerzy R. Różański
See On-line Journal of Current Economic and Social Topics 2015

Submitted: 2015-11-30 21:14
Revised:   2015-12-13 23:34