The Location of Export-Oriented Foreign Direct Investment in the Caribbean Basin

Abstract

This paper analyzes the location of export-oriented manufacturing investment. The analysis focuses on direct investment in the Caribbean Basin, using micro data for all reported manufacturing plant openings from 1984–87. We test a broad range of influences on country selection and compare the results with the existing literature on foreign direct investment in less-developed countries. The probability of country selection was estimated with a conditional logit model. The estimates were then used to predict the location of Caribbean Basin investments made in 1988 and 1989. Twelve independent variables were tested. Six variables had a statistically significant, positive relationship with plant location: per capita GNP, exchange rate devaluation, the length of income tax holidays, the size of free trade zones, political stability, and manufacturing concentration. Negative relationships were found for the wage rate, inflation rate, transportation cost, and profit repatriation restrictions.