BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
Estimating the Determinants of Foreign Direct Investment Inflows: How Important are Sampling and Omitted Variable Biases?
() and Nauro F. Campos
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; (follow links to similar papers)
JEL-Codes: C33; F21; O16; P27; (follow links to similar papers)
40 pages, June 16, 2004
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