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SEMESTER 1, 2021
Empirical Project Individual
Report
Table of Contents
I. Overview and data collection..................................................................................................3
1. Overview of topic...........................................................................................................................3
2. Data collection................................................................................................................................3
3
II. Descriptive statistics and revelant tests of checking OLS assumptions...................................4
1. Descriptive Statistics......................................................................................................................4
3. Hypothesis of F-test........................................................................................................................8
4. Hypothesis of T-test........................................................................................................................8
5. Dicussion......................................................................................................................................11
1. Dummy Variable..........................................................................................................................12
3. Interaction term............................................................................................................................13
V. CONCLUSION.........................................................................................................................15
VI. REFERENCES......................................................................................................................17
1. Overview of topic
In recent decades, foreign direct investment is a significant factor in economic growth and global
economic globalization (Wang et al. 2021 & Blomstrom & Co. Wang, 1989). Ansongu et al.
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(2018) use panel data analysis from 2001 to 2011 to examine the determinants of FDI inflows
into fast-growing economies (BRICS and MINT). Additionally, this conducted demonstrates that
market size, NResGDP, infrastructure, inflation, and trade openness influence FDI. There are
positive and significant signs for market size, infrastructure availability, and trade openness,
while the sign for NResGDP is negative but insignificant, implying that BRICS and MINT
countries are less dependent on natural resources and more likely to receive FDI. The study
shows that the inflation coefficient is positive and insignificant, implying that it has less impact
on the investment decisions of multinational corporations.
BRICS MINT
Brazil Mexico
Russia Indonesia
China Nigeria
South Africa Turkey
Table 1: Details countries in BRICS and MINT
2. Data collection
Data collection and data cleaning process
The data are cross-sectional collected from the World Bank through 30 countries throughout the
Americas region in 2010 with the aim of understanding the five determinants of FDI inflows,
including exports and imports of goods and services, population with ages 15-64, GDP per capita
and inflation.
During the data cleaning process, missing values in the determinants of foreign direct investment
will be replaced with data from other reliable sources. For instance, The World Data Atlas
inflation for 2010 for Argentina and Belize was collected from The World Data Atlas. In
addition, exports and imports of goods and services in Guyana, St. Lucia, and Trinidad and
Tobago in 2010 were gathered from Countries data. Furthermore, Excel's Conditional Formatting
function is used to highlight and remove countries with no data.
5
provides the estimated percentage change for specific variables (Benoit 2011). Additionally, the
natural logarithmic transform is convenient to convert a highly skewed variable to a more
approximate than normal variable (Changyong et al. 2014).
1. Descriptive Statistics
Standard
N Mean deviation Maximum Minimum
15,508,173,69 264,039,000,00
FDI
30 2 49,696,901,227 0 60,420,861
Population
with ages 15-
64 30 20,051,879.53 44,419,608.42 206,672,064 60,126
6
GDP per capita 30 10,905 11,590 48,467 1,172
Table 2: Descriptive result (actual value) in FDI, population and GDP per capita
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coeff std err vif
Intercept -1.366856948 2.424292245
LogGDP 1.101408218 0.159885069 1.32656717
LogPOP 0.840894751 0.080577078 2.13201815
EXP 0.001154627 0.0119186 2.45887287
IMP 0.00731912 0.015763028 4.61885341
INF -0.074040345 0.025546997 1.126516
Table 5: Collinearity Statistic
𝐿𝑜𝑔𝐹𝐷𝐼=1.366+0.001𝐸𝑋𝑃+0.007𝐼𝑀𝑃+0.84𝐿𝑜𝑔𝑃𝑂𝑃+1.101𝐿𝑜𝑔𝐺𝐷𝑃−0.074𝐼𝑁𝐹+𝜀1
2. Interpret Godness-of-Fit – R2
8
Regression
Analysis
OVERALL FIT
Multiple R 0.959826712
R Square 0.921267317
Adjusted R Square 0.904864675
Standard Error 0.675245956
Observations 30
Goodness-of-Fit describes how well the sample data fits a set of observations and is measured as
R-squared, representing the proportion variation in the dependent variable associated with
explanatory variables. The R-square of our final model is 0.92, indicating that 92% of the
variation in the natural logarithms of FDI in 2010 is explained by all explanatory variables
including in the model while 8% is due to other factors not included in model (table 7).
3. Hypothesis of F-test
In regression, the F-Test determines whether your linear regression model fits the data better
than a model without explanatory variables. The significant level chosen is 𝛼=1%.
The null hypothesis 𝑯𝟎:𝜷𝟏=𝜷𝟐=…=𝜷𝒌=𝟎 (The explanatory variables are not useful at all in
explaining the dependent variable)
The alternative hypothesis 𝑯𝟏:𝜷𝒌≠𝟎 (At least one independent variable is statiscally significant
to dependent variable)
Based on illustrated table 8, the p-value of F-test in Anova area is lower 0.000, which is lower
than the significant level of 0.01. Thus, we will reject the null hypothesis of F-test; in other
words the explanatory variables are useful in explaining the dependent variable.
4. Hypothesis of T-test
^
βj se ¿ df t-critical t-critical t-critical
value ( value ( value
α =1 % ¿ α =5 % ¿ (α =10 %)
EXP 0.001 0.011 24 2.492 1.7108 1.3178
Define hypothesis
The null hypotheis 𝐻0:𝛽1=0 (There is no effect of exports on FDI)
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The alternative hypothesis 𝐻1:𝛽1>0
Define hypothesis
The null hypotheis 𝐻0:𝛽2=0 (There is no effect of imports on FDI)
The alternative hypothesis 𝐻1:𝛽2>0
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𝛼=10% and df=24
T-statistic=0.467 < C0.1=1.3178; ; therefore the null hypothesis is failed to reject at siginificant
level of 10%
We conclude that exports of goods and services influence that is insignificantly at significant
level of 1%, 5% and 10%.
c) Log(Population)
Define hypothesis
The null hypotheis 𝐻0:𝛽3=0 (There is no effect of population on FDI)
The alternative hypothesis 𝐻1:𝛽3>0
Log(population) = 0.84 indicates that for every additional 1% increase in the percentage of
population with ages 15-64, the foreign direct investment will increase by 0.84%, holding all
otther factors constant.
d) Log (GDP)
Define hypothesis
The null hypotheis 𝐻0:𝛽4=0 (There is no effect of GDP per capita on FDI)
The alternative hypothesis 𝐻1:𝛽4>0
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Since t-statistic=6.924 > C0.01=2.492; therefore the null hypothesis is rejected and the GDP per
capita is significant at significant level of 1%. As H0 has been rejected for 𝛼 =0.01, it will also be
rejected for 𝛼=5%, 10%.
Log(GDP) per capita =1.101: This means that GDP per capita increase by 1%, the probability
that foreign direct investment inflows will rise by 1.101%, holding all otther factors constant.
e) Inflation rate
Define hypothesis
The null hypotheis 𝐻0:𝛽5=0 (There is no effect of inflation rate on FDI)
The alternative hypothesis 𝐻1:𝛽5<0
𝛼=1% and df=24
Since t-statistic=-2.96 < C0.01=-2.492; therefore the null hypothesis is rejected and the inflation
rate is significant at significant level of 1%. As H0 has been rejected for 𝛼 =0.01, it will also be
rejected for 𝛼=5%, 10%.
Inflation_rate= -0.074 implies that if for every one unit of inflation rate increases, the foreign direct
investment inflows will decline by 7.4%, holding all otther factors constant.
5. Dicussion
Reflecting the regression results with part 1, there are many differences that need to be
considered because of different data analysis methods. First, the most obvious difference that can
be seen is the effect of the inflation rate on the dependent variable, a previous study has shown a
negligible relationship between the inflation rate and FDI inflows. This is inconsistent with our
results. However, the market size positively impacts the FDI inflows, which matched with our
model because market size proxied by GDP per capita, which was supported by a study of Azam
and Lukman (2010). Population aged 15-64 years is defined as the working-age population
(Fazekas 2005) demonstrating a positive relationship with FDI inflows, which is also consistent
with our Model 1.
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IV. FURTHER DISCUSSION
1. Dummy Variable
With the calculation median of an independent variable which is GDP per capita by Excel and
resulting in the median value of $7,760.093. As intructed in the requirement, GDP per capita is
transformed into dummy varible, in which the high-living standard (larger than the median) is
recorded as 1 and otherwise is recorded as 0. Based on regression results (Appendix 3), the
sample MLR of Model 2 can be written as:
LogFDI=9.856 +0.002 exp−0.011 IMP+0.744 log ( POP ) −0.107 INF+1.7925 Highlivingstandard +ε (2)
The null hypothesis 𝐻0:𝛽𝐻𝑖𝑔ℎ 𝐿𝑖𝑣𝑖𝑛𝑔 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑=0 (There is no difference in FDI inflows of
living standard levels)
The alternative hypothesis 𝐻1:𝛽𝐻𝑖𝑔ℎ 𝐿𝑖𝑣𝑖𝑛𝑔 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ≠0
The p-value is 0.0000 (table 11), which is lower than the given significant level of 0.01. Thus,
we reject the null and the effect of variable High Living Standard in Model 2 is statistically
significant at 1%.
Interpret coefficient
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𝛽𝐻𝑖𝑔ℎ 𝐿𝑖𝑣𝑖𝑛𝑔 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑=1.7925, which means that the percentage change in FDI inflows is
higher 179% for the dummy variable high living standard than for the reference group, holding
other factors constant.
3. Interaction term
We constructed an interaction term as instructed, of which detail results can be found in table 12.
The sample MLR of Model 3 can be written as:
LogFDI=12.322+0.008 exp−0.016 IMP+ 0.577 log ( POP )−0.1105 INF−2.042 High Living Standard+ 0.2546 lo
(3)
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∂ LogFDI
= 0.577 + 0.354.Highlivingstandard
∂ LogPop
𝛽log𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛.𝐻𝑖𝑔ℎ 𝐿𝑖𝑣𝑖𝑛𝑔 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 = 0.254 means that the living standard increases, the
additional effect of population on the FDI inflows will be larger for the countries with high living
standard compared to other groups. If the population with ages 15-64 increase by one unit, the
FDI inflows in countries will change by 0.577 + 0.354.Highlivingstandard, holding other
factors constant.
As instructed, we calculated square term of GDP per capita and estimated Model 4, of which
detail results can be found in Appendix 5. The sample MLR of Model 4 can be written as:
LogFDI=4.817−0.007 exp+0.018 IMP+0.943 log ( POP )−0.097 INF+0.0002 GDP per capita−0.0000 GDP per
(4)
The statistical significant is used to check the significance of square term’s coefficient in the
multiple linear regression model. In our model, the significance level of 𝛼=1% is chosen to
confirm that Ln(FDI) can be associated with the square term.
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The null hypothesis H 0 : βGDP per capita =0 (There is no non-linear relationship between GDP per
2
The p-value is 0.0001 (tbale 13), which is lower than significant level of 0.01. Thus, we reject
the null meaning that the non-linear relationship between GDP per capita on FDI inflows is
statistically significant at 1% significance level.
The marginal effect of GDP per capita on FDI inflows can be described as:
0.0002−2∗4 . 88278 e−09 GDP per capita
Interpret significant coefficience
In other words, the first one unit increase in GDP per capita would result in an increase of 0.02
percentage points in FDI inflows. GDP per capita increase in the second one unit, FDI inflows
will increase by 0.0002-2*4.88278e−09×(2) percentage points and so forth.
V. CONCLUSION
Our model studies FDI determinants using cross-sectional data on 30 countries in the Americas
region in 2010. Using multiple linear regression models (1) and OLS assumption 3, 5
determinants including exports and imports of goods and services, population, GDP per capita
and inflation rate do not correlate. Based on the R-squared of the output, 92.12% of the R-
squared, very close to 1, indicates that the regression model is Good is Fit. The F test shows that
the selected group of independent variables has significance for the dependent variable.
Moreover, the T test also shows that 3 independent variables are significant for FDI at 1%
significance level. We find that the increase in working age population and GDP per capita
significantly affect FDI with a positive sign. However, the inflation rate have a negative impact
on FDI inflows. Notably, our models' dummy high standard of living and the squared term are
significant at the α = 1% level; while the terms of interaction are significant at α = 5%.
More countries are attempting to attract FDI, resulting in increased competition between
countries (El Banna et al. 2017). As a result, recommendations have been made to support
critical policies aimed at increasing FDI attraction. Hossain (2017) demonstrated that developing
countries with economic freedom has a positively significance with FDI. Governments can
promote economic freedom by establishing a regulatory framework that safeguards owners'
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property rights (Lawson n.d). Furthermore, governments allow households and businesses to
manage a larger share of income and wealth for their own use. Also, governments limit the
financial burden on economic activity through taxation to enable households and businesses to
manage a larger share of income and wealth (Hayek n.d)
Our model uses cross-sectional data analysis, so it cannot generate a comprehensive relationship
between all the independent variables and FDI inflows. Therefore, future research should prefer
using panel data collected from several periods to observe data trends through the same group of
units. When it comes to the actual construction of a regression model, errors can arise from
omitting irrelevant variables or the inclusion of irrelevant variables. Therefore, the model needs
to follow the theory, and then includes all the variables available under the theory and then
excludes the least theoretically important and least added variables (Azubuike & Chinaka 2020)
For further study, infrastructure availability as a new independent variable will be considered in
this model. Based on the evidence gathered from the previous study (Ansongu et al. 2018), it can
be seen that infrastructure plays an important role in FDI attraction. Host countries with highly
developed infrastructure tend to increase investment productivity, thereby attracting higher levels
of FDI (Armah 2016, Wheeler & Mody 1992). Furthermore, human capital is a factor associated
with foreign direct investment, often represented by education (Miyamoto 2003). Bhaumik and
Dimova (2013) demonstrate that government expenditure increases in investing in human capital
in developing countries. This leads to an increase in FDI and can contribute to efficient economic
growth.
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