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Political Stability and Foreign Direct Investment
Kim Haksoon冬天雪景
1．INTRODUCTION除夕朋友圈文案
F oreign direct investment (FDI) has become the important issue in finance and economics since the globalization of capital markets. The saturation of domestic capital market drives each country to invest in the foreign capital markets in terms of financial internationalization. Recently, emerging market countries, especially China and India, become the world's foremost FDI targets. From the World Bank (2002) report, we can e that net FDI to developing countries has incread since 1985.
Many rearchers in finance and economics try to find the factors that affect the FDI. For example, Lucas (1990) argues that only political risk is an important factor in limiting capital flows. Investments in many developing countries are expod to large political risks, so FDI inflows are large for politically unstable countries. By the same token, FDI outflows are large for politically stable countries to invest in countries with large political risks. Fry, Clasns, Burridge, & Blanchet (1995) found that the requirement to surrender export proceeds to the monetary authorities and the existence of special exchange rates for some capital account transactions reduces the probability that FDI is independent.
The more liberal a country's foreign exchange system, the more likely FDI is to be independent or exogenous. FDI is associated with a larger increa in capital formation when it is independent than when it is "Granger-caud" by other capital flows. Singh and Jun (1995) also show that political risk and business operating conditions have been important determinants of FDI for countries that have historically attracted high FDI. For countries with relatively low FDI, a key determinant was the degree of sociopolitical instability. A country's orientation toward exports is the strongest variable for explaining why a country attracts FDI. Chan and Gemayel (2004) find that the degree of instability associated with investment risk is a much more critical determinant of foreign investment in the Middle East and North Africa region countries than it is for developing countries, which have lower level investment risk.
There are other factors, including above-mentioned ones of FDI. They are macroeconomic determinants、internalization theory、intangible asts、capital market mispricing、shareholder's wealth effect and stock market liberalization and corporate许昌景点
governance.
In view of related literature, we can e that there are numerous factors that affect FDI, but not domi
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nant factors. The objective of this paper comes from the Lucas (1990)'s argument that only political risk is an important factor in limiting capital flows. According to his paper, either human capital bad approach or monopoly rents approach is not an important factor in explaining capital flows. For the empirical support and extension of his argument, we examine the following hypothesis.
a. Hypothesis 1
FDI inflows are high for politically unstable countries, while FDI outflows are high for politically stable countries, after controlling for macroeconomic factors.
La Porta et al. (1999) constructs the quality of government index around the world. They divide government quality variables by five categories, and find that rich nations have better governments than poor ones. Ethnolinguistically homogenous countries have better governments than the heterogeneous ones. Common law countries have better governments than French civil law or socialist law countries. Predominantly Protestant countries have better governments than either predominantly Catholic or predominantly Muslim countries. The quality of governments also is cloly related to its interference with private ctors. However, they did not mention whether the political stability of governments goes hand in hand with its interference with private ctors. From th
eir five categories, we u the direct measure of political stability. They are corruption index in the government efficiency category and political rights index and democratic index from political freedom category. Corruption index is the index of corruption in government from International Country Risk Guide (ICRG). Low corruption index means high political stability. Political rights index is the index of political rights from Freedom of the World, 1996. Democracy index is the average of democracy score for the period 1970-1994 from Polity III: Regime Type and Political Authority, 1800-1994. High political rights index and democracy index mean high political stability.
We know that the quality of government is cloly related to its interference with private ctors, leading to the performance of private ctors. However, we do not know whether the political stability of government is related to its interference with private ctors. We argue that political stability measures are cloly related to the performance of the private ctor in general, and it will also affect the FDI inward
performance, by looking at the recent economic development of China and Russia. (Note 2) Their line of reasoning is also consistent with the view of Lucas (1990), becau politically unstable countries attract more capital flows which lead to the higher possibility of better performance of FDI. By combining the argument of Lucas (1990) and La Porta et al. (1999), we can construct a following
hypothesis.
b. Hypothesis 2
FDI inward performance is high for politically unstable countries, after controlling for macroeconomic factors.
The remaining paper proceeds as follow. Section 2 describes the econometric techniques and the model tup that are ud in this paper. Section 3 explains data and variable construction. Section 4 shows empirical results Section 5 ends the paper.
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2. THE REVIEW OF ECONOMETRIC TECHNIQUES AND MODEL SRTUP
Since our sample is the panel data, we perform three different empirical techniques for the panel data to strengthen our empirical results. First, we perform pooled ordinary least squares (OLS) with robust standard errors for the panel data using robust (cluster) covariance matrix as in Wooldridge (2002). According to Wooldridge (2002), the error term in the panel data will be rially correlated, even if the pooled OLS meets the consistency assumption. Also, the rial correlation does not decrea as the cross-ction and time-ries increas. So, we need to u robust (cluster) covariance matrix.
Second, we perform feasible generalized least squares (GLS) for the cross-ctional time-ries linear models. This technique allows estimation in the prence of AR(1) autocorrelation within panels and cross-ctional correlation and heteroskedasticity across panels.
3. DATA AND VARIABLE DESCRIPTION
Different data sources are ud in this paper. FDI data is from World Investment Report (WIR) Annex Tables, the United Nations Conference on Trade and Development (UNCTAD). World Investment Report Annex Tables provide detailed statistical data on FDI flows, FDI stock and cross-border mergers and acquisitions. We u three year average FDI inflows, FDI outflows and the performance of FDI inflows as dependent variables in the regression analysis. We matched the latest year of the three year to the year of controlling variables. (Note 4) The three year average of FDI inflows is the three year average foreign direct investment inflows in millions of dollars. The three year average of FDI outflows is the three year average foreign
direct investment outflows in millions of dollars. The three year average performance of FDI inflows is the three year average inward foreign direct investment performance index. If the performance is better, the index shows greater value. The variables are all from World Investment Report (WIR) Annex Tables, the United Nations Conference on Trade and Development (UNCTAD).
Controlling variables are as follow. GDP is the three year average GDP in millions of dollars. Three of them come from World Investment Report (WIR) Annex Tables, the United Nations Conference on Trade and Development (UNCTAD). The real exchange rate is calculated using nominal exchange rates and price indices from the IMF International Financial Statistics. There are veral papers analyzing the relationship between exchange rate and FDI (Froot and Stein, 1991; Klein and Rongren, 1994; Dewenter, 1995; Blonigen, 1997). Corporate top tax rates, which are the maximum marginal corporate tax rates in each country and year, are from the World Tax Databa maintained by the Office of Tax Policy Rearch at the University of Michigan. There is a paper investigating the relationship between tax rate and FDI (Desai et al., 2004). Capital account openness is bad on Brune et al. (2001). We form a clodness index, using Brune et al. (2001) data, as the way in Baker et al. (2006). Political stability measures are described briefly in the introduction ction.
4. EMPIRICAL RESULTS冬天落叶的诗句
a. Summary statistics
Descriptive statistics for the entire sample is prented in Table 1. The definitions of the variables are
the same as the ones in Table 1. Total of 305 country year obrvations are in the sample from 1990 till 2002 spanning 28 countries. Some countries have missing real exchange rate data, so the exchange rate ries for the countries are indexed with the dollar exchange rate in the year that is obrved first. Democratic index (democratic) and public ctor employment ratio (PSEmpRatio) are missing for Hong Kong. Government consumption expenditures (GC/GDP) and total government transfers and subsidies are missing for China. Public ctor employment ratio is missing for Israel. The mean FDI flows are similar, while their median is significantly different from the mean. The standard deviations of FDI flows are large.三门峡景区有哪些景点
For example, the standard deviation of FDI outflows is almost the twice of its mean value. It suggests that each country's FDI flows vary over its characteristics. FDI inward performance also varies over each country's characteristics. The mean FDI inward performance is clo to the standard deviation, while median value is relatively clo to the mean. Overall, FDI flows and inward performance significantly
