| Despite the growing interest in capital and technology issues, certain issues still remain to be explored regarding the determinants of foreign direct investment by a multinational corporation and the corporation's consequent choice of investment location. This dissertation addresses some of these concerns by analyzing the determinants of foreign direct investment by a multinational corporation, both theoretically and empirically. For this purpose, I have adapted the structured approach to foreign direct investment in the face of political instability as developed by Stevens (1994), with certain modifications and extensions. First, the theoretical model is modified to examine the role of infrastructure in the investment decision making process. Second, to examine the importance of political factors in explaining foreign direct investment in detail, the model is extended to incorporate the linear relation between the probability of non interruption of normal operations and some interesting institutional variables describing the political environment (e.g., regime type, regime duration, repudiation of contracts, expropriation of private investment, corruption in government, quality of bureaucracy, and rule of law). The theoretical model implies that both traditional as well as nontraditional factors matter in determining the flows of foreign direct investment in a country.; The generalized investment theory on foreign direct investment then is tested empirically using an extensive panel data for U.S. aggregate all-industry foreign direct investment to 44 countries over the period from 1983 to 1990. The estimation results provide substantial support for the importance of both traditional and nontraditional factors in determining flows of foreign direct investment in a country. Results indicate that an increase in infrastructure has a positive influence on investment, and the effect of infrastructure on investment is robust to the way the infrastructure is measured. Apart from this traditional variable being important, the nontraditional variables also prove to be important as determinants of foreign direct investment in a country. In particular, results confirm that regime type, regime duration and property rights' index are important determinants of foreign direct investment into a country. Furthermore, the country-specific dummies show high level of significance, reflecting the importance of the country-specific characteristics in explaining flows of foreign direct investment.; Finally, the results are tested for robustness, and is answered in affirmative. To explore the issue of robustness, two additional experiments are performed: one concentrating on the total manufacturing foreign direct investment as the dependent variable as opposed to the aggregate all-industry category as used in the earlier analysis, and the other splitting the sample into different country groups based on the World Development Report. The results from both experiments confirm the importance of the traditional and nontraditional factors used for the estimation.; The main question motivating this thesis is to examine the importance of the traditional and the non traditional factors in determining foreign direct investment in a country in a structured framework. Both the theoretical and empirical analysis convey the importance of the above factors for the decision making process of an investor. Armed with these findings, this thesis suggests that if an investor wants to invest in a country, the final decision will be influenced considerably by the overall integrity and stability of the country's economic and political climate. |
