Econometric Methods

Pratip Pradhan (0286/53)

Analysing Key Determinants of FDI in Harish Padigala (0267/53)

Developing Countries Kalpendu Rawat (0175/53)

Makam Anil Krishna (0212/53)
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Kadali Ramoji Rao (0174/53)
 Introduction
Foreign Direct Investment:
Ownership of an enterprise in one country by an entity based in another
country.

Developing Countries:
Nation or a Sovereign State with a less developed industrial base and a low
Human Development Index (HDI) relative to other countries.

Problem statement:
Analysing and Evaluating the key factors influencing FDI inflow in
developing countries

Motivation:
+ Importance of FDI for developing countries
Local productivity growth
Technology and skills development
Employment opportunities
+ World Economic Situation and Prospects, 2017
20% fall of total FDI to developing economies in 2016

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 Parameters
GDP

Market Size Per Capita GDP

GDP Growth Rate

Labor Wages
Profitability
Taxes
Factors Affecting FDI
Inflow

Openness of Economy Trade as % of GDP

Infrastructure

Stability and Feasibility Political Stability

Country Risk Rating

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 Data Source

The sample set consists of 37 developing countries

with data pooled over the period 2000-2014

Data on macro factors such as trade %age of GDP,

inflation, GDP per capita are sourced from the
World Bank Database.

Data on corporate tax rates across countries is

taken from the KPMG website

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 Data Description

Variables Description Range

FDI % GDP FDI as % of GDP -16.07% to 50.74%

Infrastructure Length of telephone line in km per 1000 people 0.18 km to 37.77 km

Trade % GDP Net export as a % of GDP 0% to 178%

GDP Per Capita GDP per person considering PPP $111.36 to $22649.38

Corruption index 4 to 75

Political Stability Index An index calculated by world bank -2.39 to 1.18

Inflation CPI Inflation rate in the CPI -2.29 to 109.59

Per Capita GDP Growth Rate GDP growth rate per person -12.39 to 13.64

Corporate Tax Rate 10% to 55.9%

Ease of doing business 0 to 75

Labour Force as % of Population 25% to 60%

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Summary Statistics

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 Model
y = 0 + 1 x1 + 2 x2 + 3 x3 + 4 x4 + 5 x5 + 6 x6 + 7 x7 + 8 x8 + 9 x9 + 10 x10 11 x11

y = log(FDI)

x1 = Infrastructure (Proxy: fixed telephone lines per 100 people)

x2 = Openness of economy (Proxy: Trade as a % of GDP)

x3 = GDP per capita (Proxy for market size)

x4 = Political Stability Index

x5 = Coruption Index (Proxy for quality of institutions)

x6 = Corporate Tax Rate

x7 = Labour force as a % of population (Proxy for labour availability)

x8 = log(CPI Inflation)

x9 = Ease of doing Business Index

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 Methodology

We used the pooled data to model the FDI inflows for 37

developing countries over the period 2000-2015

Then we formed two sub samples of data

2000-2006 and 2007-2015

This was done to check how the contribution of the variables

changed over time

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 OLS
Regression with Time as a Trend Variable

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 Multicollinearity

Ease of doing business is highly correlated with corruption index.

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OLS-Post Removal of Multicollinearity

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 Omitted Variable Test

OV test indicates omission of variables

Inclusion of non-linearity in variables removes the problem of omitted

variables
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Heteroscedasticity

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 Breusch Pagan Test

On the basis of the Breusch Pagan Test, the null hypothesis of constant variances can be
rejected hence confirming the presence of heteroscedasticity in the model

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Robust Regression

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 WLS Regression

Political stability and corporate tax rate are significant.

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 OLS with year as dummy

Significance of D7 indicates that 2007 was a significantly different year as compared

to the other years. 17
Analysing FDI Inflow from 2000 to
2006

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OLS Model

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Breusch Pagan Test

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Robust Regression

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WLS Regression

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Analysing FDI Inflow from 2007 to
2015

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OLS Model

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Breusch Pagan Test

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 Comparison

Variables Coeff. (2000-2006) Coeff. (2007-2015)

Year 0.071 -0.0075
Infrastructure 0.033 0.037
Trade % GDP 0.008 0.009
GDP per capita -0.00008 -0.00003
Corruption Index 0.024 0.028
Political Stability Index 0.003 0.071
Per capita GDP growth 0.003 0.027

After 2007, strength and significance of predictors of FDI inflow has

increased significantly.

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 Conclusion
The results show that better infrastructure, trade openness and growth rate of
per capita income have a positive effect on FDI

GDP per capita which was used as a proxy variable for market size has a
negative coefficient while the growth rate of GDP per capita has a positive
sign.

This shows that investors prefer a growing economy over a large economy

Corruption Index has a significant and negative value which indicates that the
absence of good institutions hinders FDI inflows

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28
Appendix

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 Reference

LITERARURE

Title
Determinants of foreign direct investment flows to developing countries: A cross-
sectional analysis

Author
Erdal Demirhan, Mahmut Masca

Journal
PRAGUE ECONOMIC PAPERS, 4, 2008

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