The Determinants andImpacts of Foreign DirectInvestment
MSc Economics Dissertation- London Metropolitan University
Delali Accolley MSc (Econ)
Supervisor: Dr. Joe Pearlman
Some theories on the determinants and impacts of Foreign Direct Investment(FDI) are presented and critically discussed. In the empirical investigations whichfollow this, the effects of some macroeconomic variables such as economicgrowth, market size, degree of openness, real effective exchange rate, andlabor cost on flows of FDI into the USA have been tested. In the specification ofthe econometric model, account has been taken of the fact that economicgrowth could be both a determinant and impact of FDI inflows. The main findingis that economic growth in the USA does not explain the long-run behavior ofthe FDI inflows equation. It can explain its short run behavior but not significantly.Besides, it has been found that FDI inflows contribute to economic growth in theUSA. Open-market operations have been proposed as economic policy toattract FDI flows.
The Determinants and Impacts of Foreign Direct InvestmentDelali Accolleyaccolleyd@excite.com
Contents
Abbreviations and Acronyms
iii
Introduction11Definitions12The compilation of FDI flows23A Brief History of FDI34The Outline of the Dissertation5Summary6Chapter 1The Determinants of FDI71.1The Microeconomic Determinants of FDI71.1.1The Internationalization Model of Uppsala School81.1.2Vernon’s Product-Cycle Hypothesis111.1.3The Industrial Organization Theories of FDI121.2The Macroeconomic Determinants of FDI121.2.1Exchange Rate121.2.2Economic Growth141.2.3Market Size151.2.4Other Determinants151.3Dunning’s Eclectic Theory of FDI16Summary`16Chapter 2The Impacts of FDI192.1The Impacts of FDI on the Host Country’s Economy192.1.1Economic Growth192.1.2Balance of Payments222.1.3Other Impacts222.2The Impacts of FDI on the Home Country’s Economy232.2.1Employment232.2.2Balance of Payments23Summary23Appendixto Chapter 2Trade Creation and Trade Diversion versus FDI25Chapter 3Empirical Investigations273.1The Models273.2The Economic Assumptions Underlying the Models293.3The Data30
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1.3 Dunning’s Eclectic Theory of FDI for Accolley, Delali (2003) The Determinants and Impacts of Foreign Direct Investment
Some theories on the determinants and impacts of Foreign Direct Investment (FDI) are presented and critically discussed. In the empirical investigations which follow this, the effects of some macroeconomic variables such as economic growth, market size,…
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