Endogenous Determination of FDI Growth and Economic Growth:The OECD Case



f '( k *) k * . ,       ,           „        . , .              .           , .              .      ,      ,

where ' f-— is the share of capital income in total income in the domestic country.

f ( k )

Equation (8) indicates that the growth rate of domestic economy is supported positively by
g

FDI and negatively by returns out of sum of claims of foreigners, that is, fd > θ an^
d   < 0.4

(k* -k)

We need to define an FDI behavior next to modeling the foreign economy in order to
search theoretically the relationship between FDI growth and economic growth. We believe
that this is below the purposes of this work. For that reason, we would rather prefer to directly
exploit the literature on the determinants of FDI. The literature suggests that
ex ante
differences between domestic and world interest rates, the size of the economy, the growth
rate of economy, export growth rate of economy are some major determinants of FDI.
Therefore, without any theoretical exposure, we will directly argue that the following function
represents the FDI behavior:

FDI = f(gy,M)
where
M represents vector of variables next to the growth rate of domestic economy that
contributes to the determination of FDI.

(9)


3. Data, Method and Limitations

3.1. Data

FDI inflows data have been retrieved from World Development Indicators Online Database.
Raw FDI data were in current US$. Real FDI per capita data were formed by using population
statistics, which were collected from Penn World Table Database, and CPI, which were
collected from World Development Indicators Online Database. FDI per capita growth rates
were calculated simply from per capita real FDI. A similar procedure was applied for
determining export growth rates. Firstly, exports of goods and services data were collected
from WDI Online Database. Next, per capita exports values calculated by using population
data from Penn World Table and finally growth rates of export per capita were found. Growth
rates of per capita GDP values were directly retrieved from WDI Online Database. Finally,
human capital data are collected from Barro-Lee Dataset, which consists of post-secondary
education levels of adult population.

Our data set consists of 23 OECD countries and covers time period of 1975-2004. We
included Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Iceland,
Ireland, Italy, Japan, Mexico, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden,
Switzerland, Turkey, United Kingdom, and USA in our data set. We dropped Belgium and

4


g~~y


As Annex B


indicates,


~*


f(k )k


~*
k


—»

~f (k~*)


*

(k - k )

+ ~------^i-----

k


the corresponding
~

k C FDI
~
- n ~* - ~* - ~*

k k k


equation for the foreign country is

, where a tilde on top of a variable indicates that


the variable corresponds to the foreign country.



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