On the Determinants of Foreign Capital Flows - DAAD partnership ...

More documents

Recommendations

Info

• A good exchange rate policy among various other governmental policies does foster investment inflows. In a country where the currency is appreciating, positive relationship with FDI is expected and vice-versa 5 . Dunning (1977) held that in the 1960’s, the increase in offshore investment was due to the shortage of dollars internationally. Singh in 1983 explored a further aspect of exchange rate on FDI issues where he linked the fact that exchange rate influences value of repatriated profits. Blonigen (1997) presents another way in which fluctuations in the exchange rate level may affect inward FDI for a host country in terms of prices of assets especially for asset-seeking investment. Other empirical studies confirmed this strong impact of exchange rate on FDI. Yoshimura and Kiyota (2003) studied the impacts of exchange rate on Japan’s FDI for different periods and their work exposed that such appreciation of the home currency vis-à-vis the host currency encouraged FDI from the home country to the host country. Moreover, an important point when considering exchange rates and FDI is to acknowledge the fact that they may have a bidirectional relationship- In countries with fixed or quasi fixed regimes, this is said to be true while for large freely floating economies, causality is said to flow from exchange rate to FDI (Liargovas and Kosteletou 2000). • Domestic Investment measured in the form of the aggregation of private/public investment and FDI is said to have a two-way relationship. Domestic firms, mainly private ones respond to FDI inflows by increasing their investment to face competition from the foreign counterparts (De Mello, 1996). As public investment is usually used as a proxy for physical and human infrastructure, it suggests that the better the infrastructure, the more profitable would be the FDI and its beneficial effects. Coughlin et al (1991) reached the conclusion that more extensive transportation infrastructures were associated with increased FDI through their study. Harrison and Revenga (1995) clearly include domestic investment as an explanatory variable of FDI but they find that compared with the size of the local market and openness to trade, domestic investment has no impact on FDI. As for causality, 5 New Economist: FDI flows, Is China crowding out the rest of Asia? 10
literature itself is ambiguous on the matter but lately as per the results of Apergis et al (2006), causality between domestic and inward FI is said to be from bilateral in the long run. When estimating the determinants of FDI, it is thus imperative to investigate the possibility of endogenous variables. To solve the latter issue, two approaches can be used- from the studies of Li and Lui (2005, p395), the first one being to test for causality and the second one is to resort to a simultaneous equation system technique within which FDI will include, many variables such as growth, human capital, infrastructure or even exchange rate fluctuation. 3.4 FISCAL INCENTIVES AS OPPOSED TO QUANTITATIVE VARIABLES Despite the fact that only quantitative factors are being considered, it is necessary to acknowledge that qualitative factors in terms of fiscal or investment incentives do also exist. “Investment incentives include direct instruments (grants or subsidies, tax holidays, investment tax credits, depreciation allowances etc.) used in order to reduce the fixed costs of making an investment and indirect instruments, such as trade tariffs and quotas and foreign exchange restrictions, that affect the decision to invest”(Pigato 2000). Many papers (McLure 1999, Shah 1995, Dunning 1993) have demonstrated that incentives rarely attract additional investment since they bring about a high fiscal cost along with the fact that they create distortions in the allocation of resources. The SADC Report (2004) underlined the fact that if there is no good investment climate in a country, then even a zero-tax regime would not attract investment. The report concluded that for African countries “taxes and regulations rank far behind other determinants”. Wells and Allen (2001) grouped two arguments against tax incentives stating that: i) Fiscal incentives may not be the first best mechanism for attracting FDI as they merely create a net transfer from tax payers to investors. ii) The costs exceed the benefits that are provided by the investments. 11
Page 1 and 2: On the Determinants of Foreign Capi
Page 3 and 4: the theoretical framework and empir
Page 5 and 6: 3.1 MOTIVES BEHIND FDI Literature o
Page 7 and 8: Closely related, FDI can be taken a
Page 9: with the idea that inward FDI is a
Page 13 and 14: Investment. For the purpose of esti
Page 15 and 16: 0 100 200 300 400 FDI US 1970 1980
Page 17 and 18: Figure 5.3 Geographical distributio
Page 19 and 20: Dependent variable: LDFDI Table 5.4
Page 21 and 22: Inference from Multiple Regression
Page 23 and 24: LOPEN Yes 25.02 (0.0000) LINV No 2.
Page 25 and 26: ESTIMATION OF THE LONG RUN RELATION
Page 27 and 28: From the findings and analysis, it
Page 29 and 30: Dunning J D. 1981. Explaining the I
Page 31 and 32: Kravis I B, Lipsey R. 1982. Locatio
Page 33 and 34: SACTRA (Standing Advisory Committee

On the Determinants of Foreign Capital Flows - DAAD partnership ...

Create successful ePaper yourself

Delete template?

Save as template?