Examining the Regional Aspect of Foreign Direct Investment to Developing Countries



3 Review of Empirical FDI Studies

This section provides a comprehensive and structured review of empirical studies of FDI
to African, Asian and Latin American countries that have taken the regional distribution
of FDI into account by including regional dummy variables, by incorporating interactions
between regional dummy variables and potential FDI determinants or by analysing FDI
on a regional basis. These papers are typically based on panel data estimation methods
where the dependent variable is FDI as a share of GDP but where the number of countries,
the time dimension and the selection of explanatory variables differ widely.

3.1 Panel Studies with Regional Dummies

Table 2 summarises the findings of 10 studies that are based on (2) in that they include
regional dummy variables. In general, the regional dummy variables should be interpreted
relative to other developing countries. A significant African dummy thus suggests that
Africa is different from other developing countries. As one exception, the regional dummies
in Addison and Heshmati should be interpreted relative to developed countries. Overall,
we find that only 10 out of the 17 dummy variables included in the 10 studies under review
report dummy variables that are significant and robust to the inclusion of an extended
set of explanatory variables.

More than half of the studies included in this review have analysed if there is a par-
ticular effect of being located in
Africa. Jaspersen et al. (2000) and Asiedu (2002) find
that African countries receive 2% and 1.3% points, respectively, less FDI than a compa-
rable country outside the region. The African dummy in Addison and Heshmati (2003),
Noorbakhsh and Youssef (2001), Ancharaz (2002) and Wilhelms and Witter (1998), on the
other hand, turned out insignificant once economic, political and structural characteristics
were taken into account.

The negative South Asian regional dummy found in Addison and Heshmati (2003)
remains after controlling for traditional FDI determinants as well as the democratic sit-
uation in these countries. However, the significant South Asian effect in Gani (2007)
disappears once governance indicators (rule of law, control of corruption and regulatory
quality) are adjusted for. While a number of studies have found a positive and significant
East Asian dummy only in the case of Addison and Heshmati (2003) did it turn out to
be robust to an extended set of explanatory variables. The
Latin American dummy
in Noorbakhsh and Youssef (2001), Edwards (1990) and Hein (1992) was not robust to
the inclusion of other control variables, while the results in Addison and Heshmati (2003)
suggest that Latin American countries receive 1.2% points more FDI than comparable
countries.



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