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

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In addition, Dunning’s underlying theory of FDI does suggest that pull factors lie as the foreground to injecting investment in an economy in terms of the OLI paradigm. Thus, fiscal incentives may be thought as secondary - as confirmed by Morisset (2003.) The work of Krever (2005) reiterates the latter fact by admitting that tax ranks low in the long list of factors considered by investors since they will go for a two stage process whereby they will first start by “screening countries based on fundamental determinants” and only those economies which satisfy the first stage requirements will go through the later one of being “evaluated in terms of tax rates, grants or other incentives as considered.” Attracting FDI is very demanding, especially in this globalized era. Policy-makers have therefore become increasingly interested in understanding the motivating factors underlying FDI. The driving force is “improving investment incentives for foreign investors” (Zitta & Powers, 2003). Although a number of investigations have been conducted in this area (Blomström & Kokko, 1998), not enough is known about the specific motivations that influence particular investment flows. 4. METHODOLOGY AND ANALYSIS 4.1 MODEL SPECIFICATION Based on literature review, no concrete conclusion can be reached to which variable has the greatest and positive impact on FDI since each and every country differs. The main objective is to determine and analyze the most important factors that affect inward foreign investment in Mauritius and for this purpose; the following model shall be used: FDI = f (GDP, OPEN, INV, PRO, RER) Equ1 Where FDI is inward foreign Direct Investment, OPEN is openness, PRO is productivity, RER is Real Exchange Rate, CTAX s the corporate tax rate and INV is Domestic 12
Investment. For the purpose of estimation however, this equation shall be represented by a logarithmic reduced form equation to capture all proportional effects of the data: LFDIt = f (LGDPt, LOPENt, LINVt, LPROt, LRERt ) Equ2 Econometrically speaking, the following equation will be formed for the purpose of regression and VAR modeling, LFDIt = β0 + β1LGDPt + β2LOPENt + β3LINVt + β4LPROt + β5LRERt + β5LCTAXt + εt Equ3 Where β is an unknown parameter which shall capture the effects of each variable with β0 being a constant (the intercept term) and εt, the random error term. The subscript “t” is added to the variables to show that these are time series data. The period of study is 1976- 2009. 4.2 DEFINITION OF VARIABLES Dependent variable The dependent variable, FDI, is measured as the foreign direct investment inflow in terms of US $ and is a widely used measure (Goodspeed et al, 2006). The main source has been from the BOM and confirmation of the data comes from the BOI and the UNCTAD Statistics. The table below is based on appropriate research studies and works 6 which have been laid down with respect to the similarities of the conditions in Mauritius in order to arrive at the expected results. Independent Variables Table 4.1 Summary of independent variables and their respective expected results Variables Calculation Researchers’ Opinion DataSource Mauritius 6 Traced back to Chapter 3: Literature Review for works and results of researchers 13 Expected Results
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 and 10: with the idea that inward FDI is a
Page 11: literature itself is ambiguous on t
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

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