Abstract
This study examines the importance of natural resources, economic freedom, and sea-access in attracting foreign direct investment (FDI) inflows to the Commonwealth of Independent States (CIS), using panel data from 1998 to 2017. The Prais-Winsten regression with panel-corrected standard errors (PCSEs) is employed for all estimations. Feasible Generalized Least Squares (FGLS), Random Effects with Driscoll-Kraay standard errors (RE (D-K)), and Random Effects of Generalized Least Squares (RE (GLS)) estimators are used to test the sensitivity of PCSEs’ estimates to changes in the underlying empirical model, whereas Instrumental Variables with Two Stage Least Squares (IV (2SLS)), Limited Information Maximum Likelihood (LIML), and Baltagi’s Two-Stage Least-Squares Random-Effects (IV (EC2SLS)) estimators are used to address potential endogeneity concerns. The estimates confirm that natural resources, economic freedom, and sea-access are robust and decisive factors affecting FDI location decisions of foreign investors in CIS. More precisely, the results suggest that increased revealed comparative advantage in petroleum, higher economic freedom characterized by the increased government size and open markets, and territorial coastlines have a statistically significant and positive effect on FDI inflows to CIS transition economies. We also find that direct access to the Black Sea and the Caspian Sea provides a significant geographic competitive advantage to Azerbaijan, Kazakhstan, Georgia, Russia, Turkmenistan, and Ukraine in attracting FDI inflows over the other CIS member-states.
Highlights
During the last three decades, foreign direct investment (FDI) inflows have experienced an unprecedented upsurge and provided a vigorous impetus for domestic investments, capital accumulation, and sustainable economic growth in developing countries [1]
The results indicate that our main explanatory variables, natural resources, economic freedom, and sea-access, are positive and statistically significant, encouraging FDI inflows to Commonwealth of Independent States (CIS) countries
This study analyzed the impact of natural resources, economic freedom, and sea-access on FDI inflows using a panel of 12 transition economies in CIS from 1998 to 2017
Summary
During the last three decades, FDI inflows have experienced an unprecedented upsurge and provided a vigorous impetus for domestic investments, capital accumulation, and sustainable economic growth in developing countries [1]. This research contributes to the existing literature by using a new and large panel dataset for 12 CIS countries from 1998 to 2017, integrating the role of natural resources, economic freedom, and sea-access in attracting FDI inflows, and applying a different empirical estimation model than that of prior studies. It addresses potential concerns over the robustness of regression results to changes in the underlying empirical model and accounts for possible endogeneity issues.
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