The macroeconomic determinants of cross-country FDI flows: A comparative analysis through the driscoll-kraay, 2SLS and GMM models

Abstract

This study investigates the relationship of foreign direct investment (FDI) with major macroeconomic variables, explicitly gross domestic product (GDP), gross capital formation (GCF), agriculture, forestry and fishing (AFF), industry, import, export, inflation, and unemployment rate. Panel data from 205 countries from 1990 to 2018 were collected from the website of the World Bank. Robustness of the result has been ensured through the combined use of ordinary least squares (OLS), pooled ordinary least squares (POLS), Driscoll-Kraay (DK), two-stage least squares (2SLS) and generalized method of moments (GMM) models. This research has found that GDP and GCF had a significant positive relationship with FDI across all the models, while AFF and the unemployment rate had a significant negative and positive relationship with FDI in all models except the GMM model. Industry and import had a significant positive relationship with FDI in the POLS model, and export and inflation had no significant relationship with FDI in any model.