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Published online by Cambridge University Press: 21 October 2015
VIRTUALLY ALL THE EMPIRICAL investigations into the causes and consequences of FDI use single-equation models. Here I estimate the five-equation macroeconomic model developed in Chapter 3 for a sample of sixteen developing countries (Argentina, Brazil, Chile, Egypt, India, Indonesia, Korea, Malaysia, Mexico, Nigeria, Pakistan, Philippines, Sri Lanka, Thailand, Turkey, and Venezuela). The results provide some new information on the direct and indirect effects of FDI inflows to this sample of developing countries. They also provide some strong indicators of the problems to be faced and pitfalls to be avoided by developing countries embarking upon policies to promote FDI inflows.
Foreign Direct Investment and Domestic Investment
THE REGRESSION METHOD used here is iterative three-stage least squares which is, asymptotically, full-information maximum likelihood (Johnston 1984, pp. 486-92). I estimate the sixteen individual country investment equations as a system of equations with cross-equation equality restrictions on all coefficients except the intercept. Hence, the estimates apply to a representative member of this sample of developing countries. The estimation technique corrects for heteroscedasticity across country equations and exploits contemporaneously correlated disturbances. The instruments are the exogenous explanatory variables plus the lagged FDI ratio, lagged domestic credit expansion divided by GNP, the lagged terms-of-trade index in natural logarithms, lagged growth, the public sector borrowing requirement divided by GNP, the world real interest rate, oil price inflation, and the rate of growth (continuously compounded) in OECD output. The estimation period is 1966-88 except for Brazil (1966-85), Chile (1966-84), Indonesia (1967-88), and Pakistan (1968-88).
Table 5 gives three estimates of the investment function with the current FDI ratio and three estimates with the average FDI ratio over the previous five years FDIYL instead of the contemporaneous FDI ratio. For the complete sample, the foreign debt ratio reduces the domestic investment ratio, while the rate of economic growth increases it, as anticipated.
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