Microdeterminants of Foreign Direct Investment into Developing Countries: Evidence from the Telecom Sector
Posted: 1 Aug 2011 Last revised: 31 Jul 2012
Date Written: August 2011
Existing literature has established that foreign direct investment flows into countries with more attractive markets and fewer political risks. We argue that the level of foreign direct investment is instead caused by risk mitigants instituted by the government and the foreign investor, which are contingent on country fundamentals. We employ a novel dataset on the universe of foreign direct investments in the telecom services sector in 103 emerging economies from 1990-1999 that incorporates 25 strategic contracting institutions for the 597 deals. To test the contingent hypotheses, we specify a linear regression model that includes interactions constructed as cross-products of market attractiveness and market risk mitigants, on the one hand, and policy stability and political risk mitigants, on the other. We avoid common model misspecification by including all main effects underlying the interactions. Our results confirm that (i) market and political risk mitigants determine levels of FDI, (ii) market attractiveness and policy stability moderate the relationship between risk mitigants and FDI, and (iii) government-instituted mitigants matter most.
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