A Dynamic Model for determining Inward Foreign ... - Business School

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2.1Theoretical Framework The theory of FDI noted by Dunning 1977 that the structure market failure hypotheses of Hymer and Caves or the internalization approach of Buckley and Casson was very much couched. In that case, Dunning brought the computing theories together to build a new single theory. Dunning's new theory shaped via combining Hymer's ownership advantages with the internalization school meanwhile added a location dimension to the new theory. Also, he considers the impact of Country's and industry's characteristics on the ownership location and internalization advance of FDI (Dunning and Lundan 2008, 86). This paper has been focused on a host country’s characteristics. This is an interesting topic, as while virtually all countries now compete energetically for FDI inflows, the distribution of those inflows is far from uniform. While some countries pull in massive amounts of FDI inflows, but others such as those in developing countries lag far behind. Thus, it is vital for FDI-seeking policymakers to have a good grasp of the underlying drivers of the MNEs’ location decisions in order to attract inward FDI. According to Dunning's eclectic paradigm of FDI shows that a firm will directly invest in a foreign country if it ensures three conditions (Jones and Wren 2006, 36): An ownership-specific asset must be possessed by the firm, which gives it advantages over other firms. Secondly, these assets must be internalized within the firm. Finally, there must be a benefit in settingup production in a foreign country rather than relying on exports. In particular, this paper has been focused on a country’s risk which is closely related with the level of business risk. It seems intuitively plausible to believe that a sound institutional environment (efficient bureaucracy, low corruption, secure property rights, etc.) should attract more FDI. Similarly, higher business risk due to high country risk would discourage foreign investment by multinationals. Hence, there are several ways of characterizing a country's L specific advantages; one of them is ESP paradigm. According to economic environment, economic system and government policies, countries are classified in the ESP paradigm of Koopmans and Montias (1971). Here environment encompasses the resources and capabilities, including a wide range of intangible assets to a particular country as well as the ability of its enterprises to use these to service domestic or foreign markets. System means the macro-organizational mechanism within which the allocation of these resources and capabilities is decided. Policy means the strategic objective of government and the 4
macro or micro measures taken by them, to implement and advance these objectives within the system and environment of which they are part (Dunning and Lundan 2008, 223). 2.2 Literature Review and Hypotheses 2.2.1 Political risk Political risk is a type of risk faced by foreign investors, MNfs and governments. It is a risk that can be understood and managed via reasoned foresight and investment. Many studies have examined the determinants of FDI in a host country. Using different econometric techniques and periods, Harms and Ursrung (2000), Jensen (2003) and Busse (2004) point out that MNfs are more likely to be attracted to a democracy. Nevertheless, Egger and Winner explore the relationship between corruption and inward FDI by using general equilibrium models and data of 73 developed and less developed countries. They highlight a clear positive relationship between corruption and FDI which means corruption is a stimulus for FDI (2005, 935-949). The analysis comprises the primary data from 145 affiliates of western MNEs in Turkey via a survey by Demirbag et al, who find that political risk, financial incentives and culture distance do not have any significant impact on the perceived performance of affiliates (2007, 330). On the other hand, according to Busse and Hefeker political risks have a significant impact on FDI inflows (2007, 401). Institutional quality and democracy appear more important for FDI in services than general investment risk or political stability (Kolstad and Villanger 2008, 530). According to Cuervo-Cazurra, corruption, arbitrary corruption and pervasive corruption have a negative influence on FDI. However, transition economies show high levels of corruption and also high levels of FDI (2008, 25). Asiedu et al state that the optimal levels of FDI decrease as the risk of expropriation rises (2009, 269). Consequently, based on this overview of the related literature, the corollary hypothesis is as follows: H 1a : There is a negative relationship between political risks and inward foreign direct investment. 2.2.2 Economic risk Economic risk could be manifested in assessing a country's economic strengths and weaknesses, which include real gross domestic product (GDP), growth, the annual inflation rate, and gross national product per head. The previous studies consider that economic risk as an important variable for foreign investors to make a decision about investment in a host 5
Page 1 and 2: A Dynamic Model for determining Inw
Page 3 and 4: 1. Introduction Foreign direct inve
Page 5: investors look for the markets whic
Page 9 and 10: exchange rate between the Japanese
Page 11 and 12: Research Methodology and Empirical
Page 13 and 14: and error correction model (ECM) ar
Page 15 and 16: 3 Model Specifications 3.3.1 Unlagg
Page 17 and 18: uncorrelated and normally distribut
Page 19 and 20: ( ) ( ) ∑ ( ̂ ) ( ) ( ) ( ̂ ) W
Page 21 and 22: 4.2 Unit Root Test The Augmented Di
Page 23 and 24: Table 4: Summery Statistics of the
Page 25 and 26: Table (5) presents results of VAR l
Page 27 and 28: Table (7) presents the Granger caus
Page 29 and 30: Table7: Vector Autoregressive (VAR)
Page 31 and 32: Table 8 (part: b): Estimates of the
Page 33 and 34: services locally, remove any impedi
Page 35 and 36: Guru-Gharana, Kishor K., and Deergh

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