Deild Titill rannsóknar Höfundur Foreign Direct Investment and the XTFEVD Method Dr. Helga Kristjánsdóttir helgakr@hi.is Findings indicate that the problems created by omission of fixed effects are quite significant and that they vary across the three most commonly used FDI datasets. As a result, when including fixed effects, much more consistency in the estimates of time-invariant variables are obtained across data sets. In general, these new estimates find additional evidence of the importance of trade costs. In particular, geographic variables such as whether the parent or host country is landlocked or an island nation also seem to deter FDI. This is suggestive of vertical FDI. Nevertheless, the distance between capitals indicates horizontal FDI. The findings of mixed results is not surprising, as industry-level results indicate that even within US data there are significant differences in the motivation behind FDI across industries. Thus, when data is aggregated across industries, one might expect evidence of both. What is notable, however, is that since XTFEVD yields far more comparable results across the datasets, using fixed effects may be very useful in removing the problems this variation causes when industry level data are not available. In addition to the main results, finding indicate that the cultural variables constructed by Hofstede (2001) are significant determinants of FDI. Thus, further research into the interaction between culture and international economic activity is important and further understanding of the ways in which these relate can have useful policy implications.