FDI determinants: dynamic extreme bounds analysis

Abstract

The aim of this paper is to develop a new analysis method, named dynamic extreme bounds analysis (DEBA), and to determine decisive determinants of foreign direct investment (FDI) by using this new method. In econometrics, the extreme bounds analysis (EBA) method is a convincing way of examining the strength of independent variables. However, the results obtained when using the EBA method contain little information, since each variable is only either strong or fragile, and some strong variables may be omitted because their significance could be undermined by just one unreasonable regression. Therefore, in order to overcome these limitations, this paper proposes DEBA, a new analysis method. The authors employ the DEBA method to determine the factors which impact FDI in 86 countries. The authors note that in developing countries, the level of previous FDI, a high degree of openness, large market size and development of infrastructure help to attract FDI, whereas the development of domestic industry deters it. In developed countries, FDI is lured by the level of previous FDI stock, a high degree of openness, large market size, macroeconomic instability and availability of energy. Although this study is expected to contribute a new methodological approach and define the strong determinants of FDI, the study is not without limitations, such as the unavailability of data. Further studies should improve the DEBA method by developing DEBA packages for use in popular statistical software, enhancing methods for other types of data and more accurately determining the estimation order of variables. In addition, further research should expand the study's FDI model, providing more potential variables for an in-depth overview of this model. This study is to contribute a new methodological approach (DEBA method) for data analysis and defining of strong determinants of FDI. The study findings are useful for governments, policy-makers and economists in formulating more attractive FDI policies.