1. Foreign Direct Investment, Culture and Fixed Effects
Dr. Helga Kristjánsdóttir
Introduction:
Fist time application of fixed effects procedure to Foreign Direct Investment (FDI). Estimating panel fixed effects with vector decomposition (XTFEVD) in three-stages:
1. Estimates for time-variant variables.
2. Takes out the unexplainable part.
3. Runs again, using the unexplainable part.
Model and Data:
The model efficiently estimates impact of time-invariant variables - while also controlling for fixed effects. Three commonly used FDI datasets are applied, running from 1980 to 2000:
1) BEA, Bureau of Economic Analysis: Bilateral US inbound and outbound, combined, stocks, affiliate sales.
2) OECD: Bilateral inbound FDI stocks. Parent or host country belongs to OECD.
3) World Bank, WDI: Total inbound and total outbound FDI flows.
Estimation Results:
Estimation results indicate that by eliminating estimation biases, the differences across datasets largely disappear.
Thus, controversies in the literature that are driven by differences in data sets may be resolved by using this estimation technique.
Findings show that omission of fixed effects, when using OLS, significantly biases several of these variables, for example when proxying for culture.
Conclusions:
Magnitude, rather than differences are an important predictor of FDI.
Results indicate that FDI comes from and goes to countries with high: Masculine values, Long term goals, Power Distance, FDI outflows from countries with high Independence, but less into these.