Foreign Direct Investment And Institutions: Case Of Emerging Economies

Abstract

This paper implements econometric analysis of the foreign direct investment inflows at the levels of different developing countries and Russian regions. A methodological base of research is a gravity model, which assumes the positive correlation between the sizes of the economies and inflow of foreign direct investment in the recipient country and negative correlation between the value of a foreign direct investment inflow and the distance between the pair of countries. The model on the country level includes the aggregated indicator, reflecting an institutional component of the host economy, namely the economic freedom index that significantly affects the value of the foreign direct investment inflow. Besides this indicator, the optimal model also includes such indicators as the common border and common language, average wages in the host country, remoteness terms. The model was estimated with the use of the Poisson Pseudo maximal Likelihood Method which solves most of the problems facing the analysis of foreign direct investment. The second part of the empirical analysis includes the estimation of foreign direct investment in Russia on the regional level, taking into account institutional aspect. Besides the indicator “Investment attractiveness”, traditionally reflecting institutional development of the region, the model also comprises the trade openness of the region, an innovation component, an unemployment rate, as well as taking into account remoteness of an investor and the region from Moscow, the main center of business activity in Russia.