Date of Award

2010

Document Type

Honors Thesis (Open Access)

Department

Colby College. Economics Dept.

Advisor(s)

Andreas Waldkirch

Second Advisor

David Findlay

Abstract

The literature on foreign direct investment (FDI) provides evidence on the relation from FDI to growth in the presence of some absorptive qualities such as existing level of development, financial market depth, trade policies and human capital thresholds. The analysis of FDI inflows in the literature so far does not include an investigation of discontinuity, or of lack of steady positive flows. Discontinuities are expected to depend on development levels and risk factors in the host country as they proxy for attractiveness of the target to the foreign investor. This paper investigates the continuity of FDI with its determinants and includes it in the list of factors that influence growth. Discontinuities are measured as a dummy variable based on a percent threshold for FDI as a percent of GDP. I use panel data for 121 developing and developed countries between 1980 and 2007. The results show the persistence of FDI flows and the effects of different determinants on the discontinuity of FDI. Among these, the most significant are openness and political stability. Panel regressions from the same period of time show that growth is negatively affected by FDI discontinuities and as the regressions control for more variables, the discontinuities variables are more significant than the FDI size measures used in previous literature. Separating OECD and non-OECD countries shows that the discontinuities robustly negatively affect growth in the non-OECD case, but are not significant for OECD countries.

Keywords

foreign direct investment, growth, non-OECD countries, continuity, FDI determinants, OECD countries

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