Flow of Foreign Direct Investment into Iceland Dr. Helga Kristjánsdóttir helgakr@hi.is Iceland main inflow of Foreign Direct Investment Introduction: Foreign Direct Investment (FDI) worldwide has proven to flow from West to East, rather than North to South, which is different from the conventional wisdom. The research question of interest here is to analyze the driving forces of foreign direct investment into a small open economy like Iceland. Model and Data: Several model specificatons are tested. These are combinations of the Gravity model and the Knowledge-Capital Model, accounting for economic size, distance, skilled labor and natural resource endowments. Also, the Heckman procedure is applied. The dataset covers 1989 through 2001. Edgworth Box Os = Origin for Source Country Unskilled Labor Origin for Host Country = Oh Unskilled host country skill(i)-skill(j)>0 Skilled host country skill(i)-skill(j)<0 Small host country Y(i)-Y(j)>0 Location of Iceland RELATIVE ENDOWMENTS SIZE Sdiff=0 Large host country Y(i)-Y(j)<0 Ydiff=0 Skilled Labor Estimation Results: The main estimation results obtained indicate that multinationals seeking fo investment opportunities in Iceland, must be preparied to be facted with a signficant threshold cost when undertaking the initial investment. Basic Bergstrand 1985 Gravity Specification Conclusions: Fixed investment costs can be expected to be important in countries like Iceland. Moreover, the zero data issue arising when dealing with sectoral data can potentially be applied more generally to countries with low secor investment. Yi is GDP of exporting country Yj is GDP of recipient country Dij is distance between economic centers of source and host countries Aij reflects factors that aid or restrict trade between country i and j log-normally distributed error term,E(lnij) = 0