An Investigation of the Determinants of US FDI in Developed Countries, 1982-2010

Abstract

The paper uses macro panel data on US FDI in developed countries during 1982-2010 to empirically investigate the influence of host country characteristics on FDI. Differing from earlier panel data studies on FDI determinants which often impose the standard restrictions of the homogeneity of slope coefficients on the observed variables and the homogeneity of the factor loadings on the unobserved common factors in the empirical specification, this paper allows the effects of observed variables and unobserved common factors to vary across countries by using recently-introduced estimators. In this research, the data seem to support the empirical specification allowing for slope heterogeneity across countries rather more than the standard ones imposing the restrictions of slope homogeneity. Empirical results indicate that the stock of US FDI in a given FDI recipient is likely to be significantly determined by market size, lower relative tax rates, and risks in terms of the investment climate, corruption and the legal environment of the host country