The Macroeconomic Determinants of Cross-Country FDI Flows: A Comparative Analysis through the Driscoll–Kraay, 2SLS and GMM Models

Abstract

This study investigates the relationship of foreign direct investment (FDI) with major macroeconomic variables, explicitly gross domestic product (GDP), gross capital formation (GCF), agriculture, forestry and fishing (AFF), industry, import, export, inflation, and unemployment rate. Panel data from 205 countries from 1990 to 2018 were collected from the website of the World Bank. Robustness of the result has been ensured through the combined use of ordinary least squares (OLS), pooled ordinary least squares (POLS), Driscoll-Kraay (DK), two-stage least squares (2SLS) and generalized method of moments (GMM) models. This research has found that GDP and GCF had a significant positive relationship with FDI across all the models, while AFF and the unemployment rate had a significant negative and positive relationship with FDI in all models except the GMM model. Industry and import had a significant positive relationship with FDI in the POLS model, and export and inflation had no significant relationship with FDI in any model. Contribution/Originality:This study contributes to the existing literature through a utilitarian way to investigate the relationship of FDI with major macroeconomic variables globally. INTRODUCTIONThis paper analyzed the relationship between foreign direct investment (FDI) and macroeconomic variables including gross domestic product, gross capital formation, value addition of agriculture, forestry and fishing, value addition of industry including constructions, import of goods and services, export of goods and services, consumer price indices and unemployment rate. It is thought that there might be a link between foreign direct investments and these variables as all of these indicators, directly and indirectly, influence the gross domestic product of a country.Shiva and Agapi (2008) said foreign direct investment and trade are also seen as significant catalysts for developed countries' economic development. They introduced FDI as an important tool for the transition of technology from developed to emerging countries. Kueh, Puah, and Abu Mansor (2009) claimed that Malaysia's Asian Economic and Financial Review

Determinants Of Foreign Direct Investment In Malaysia

“…This may mean that workers are putting more effort in to keep their jobs and thus willing to work for a lower wage rate which in turn is attracting more foreign players to invest in Russia and India. However, the study done by Paul et al (2021) discovered that the unemployment rate had a significant and positive relationship with FDI in all models except the generalized method of moments (GMM) model.…”