Foreign direct investment in OECD countries: a special focus in the case of Greece

ABSTRACT

Foreign Direct Investment (FDI) is considered as an important instrument for economic development all over the world. The aim of this paper is to examine the FDI inflows determinants for 24 OECD countries.  To this end we employ annual data from 1980 to 2012 for a series of potential FDI determinants that have been identified as the most important by the relevant literature. Our empirical strategy employs both the standard fixed effects panel as well as a dynamic panel approach. The empirical findings highlight the importance of market size, trade openness, unit labor cost, schooling, taxation, gross capital formation, institutional variables, and ROA/ROE as significant FDI determinants. In the case of the dynamic panel model those FDI inflows determinants are not uniform for all country groups. Additionally, the results indicate that corporate tax rates clearly affect FDI attractiveness. This finding is robust when testing different countries subgroups. The present study has important policy implications indicating the factors that host economies should place emphasis on in order to attract FDI inflows. Policy makers should not only pay attention to the corporate tax rate level but they should also design a simple, stable and transparent taxation system that minimizes the relevant business risk.

KEYWORDS:

• Foreign direct investment
• OECD countries
• Greece

JEL CLASSIFICATION:

• F02
• G00
• O10
• O11
• C00

This article refers to:

Addendum

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For example, the most recent previous studies focus on a limited number of OECD countries: Alam and Shah (2013) examined a 10-OECD country sample from 1985 to 2009 and Gedik (2013) examined 11 OECD countries from 1995 to 2008.

² See Dunning (2001) for a detailed presentation of the origins and the evolution of the O–L–I eclectic paradigm since the mid-1950s.

³ The log values of the variables FDI inward flows and GDP per capita are employed.

⁴ According to the definition provided by Data-Planet by the Conquest Systems, Inc. (2013), the share of gross capital formation (at current PPPs) ‘reports the share of output-based real gross domestic product (GDP) per capita that is represented by capital formation (investment), at current purchasing power parities (PPPs). Output-side real GDP allows comparison of productive capacity across countries and over time.’

⁵ See Carstensen and Toubal (2004), Alguacil, Cuadros, and Orts (2008), Kirfa-Schneider and Matei (2010) and Grubaugh (2013).

⁶ Feenstra, Inklaar, and Timmer (2013). The Next Generation of the Penn World Table, available for download at www,ggdc.net/pwt.

⁷ It has to be mentioned that due to data availability, there is no point having a single multifactor model with all potential determinants since this specification would significantly reduce the number of observations. For example, data for institutional variables are available since 1996.

We initially tested all individual institutional variables in order to identify the ones that display statistically significant results, and we concluded in the specific variable set presented in the article. Moreover, we also employed the sum of the individual institutional variables in the final model specification in order to test for their possible combined positive effect of these institutional variables.