FDI= f (i, , e, NR, GDPGR, MS, PC, HR, PRF, IF, YPC, t, EP, MTA, ROR) where: FDI:

Foreign Direct Investment i: World Interest Rate : Inflation Rate e: Real Exchange Rate relative to the US dollar NR: Natural Resources GDPGR: Real Gross Domestic Product Growth Rate MS: Market Size P C: Political Climate HR: Human Resources PRF: Presence of Rival Firms IF: Infrastructural factors YPC: Income per capita t: Taxes EP: Economic Policies MTA: Membership of International Trade Agreements ROR: Rate of Return

The researchers used two case studies, one done on European countries and the other on African countries. The first piece of literature used was The determinants of foreign direct investment into European transition economies by Alan Bevan and Saul Estrin. The variables that the authors thought best for determining the flows of FDI are GDP for host and source countries, unit labour cost (ULC) for host countries, distance between host and source countries, interest rate differential between source and host countries, trade in host country, and risk associated with host country. This study used panel data with a seven year time series and employed the use of two linear equations. Both equations utilized one year lagged explanatory variables and contemporaneous explanatory variables since some of the information became available only with a lag, e.g. risk or unit cost, however the second equation included dummy variables. After running the first regression equation most of the coefficients were statistically significant and there signs confirmed to economic theory except for trade which was only statistically significant in the lagged form. When running the second regression equation which included the dummy variable cologne to represent positive announcements about prospective EU membership, the writers found that the common variables between the two equations have coefficients that are very similar in sign, significance and value. The overall measures of fit and significance are also similar.

The second piece of literature used was Why Does Foreign Direct Investment Go Where It Goes?: New Evidence From African Countries by John Anyanwu. The variables that the author deemed as being important are urban population, Gross Domestic Product per capita, inflation rate, exchange rate, Gross Domestic Product growth rate, financial development, openness, infrastructure, human capital, Aid, first lag of FDI, corruption, regulator quality, rule of law, oil exports and the dummy variable regions which is a binary variable representing all the different regions of Africa. The data set used in the empirical analysis is cross sectional and constitutes annual data from 1996-2008 for 53 African countries and four different empirical techniques were used to strengthen his empirical results (ordinary least squares(OLS), feasible generalized last squares(FGLS), lagged variables using the OLS and FGLS method and the two-step (IV) efficient generalized method of moments (GMM) estimation method on the lagged specification. When the regression was ran all the results were statistically significant but better results were obtained in the lagged form.

FDI= f (i, , e, NR, GDPGR)

Parameters Signs B0 B1

Reasons

+ or This sign can be positive when an economys level of foreign outflows is less than its

inflows and negative when the foreign inflows are greater than its outflows.
_ This variable has an inverse relationship with investment since the interest rate is the opportunity cost of investing and an increase in the interest rate will cause investment to decrease and savings to increase. B2 _ The inflation rate is expected to have a negative relationship with foreign direct investment since it is a proxy for economic instability. The more unstable an economy the less likely investors will investment since there is a high risk on their return. B3 _ This variable has a negative relationship with investment since a depreciation of the exchange rate will result in the countrys production cost decreasing which would encourage investors to invest where costs are cheaper in a foreign country.

Parameters Signs

Reasons

B4

The level of Natural Resources available in an economy has a

positive impact on investment since the more natural resources an economy has, the opportunities it has for investment in different sectors of the economy.

B5

B5has a positive relationship with Y since an increase in the level of GDP and therefore the productivity capacity of an economy would have improved and as result persons would have an

incentive to invest.

Y=B0-B1X1-B2X2-B3X3+B4X4+B5X5+u.

Dependent Variable: Y Method: Least Squares Date: 05/03/13 Time: 01:02 Sample: 1981 2010 Included observations: 30

Variable

Coefficient

Std. Error

t-Statistic

Prob.

C X1 X2 X3 X4 X5

-69295146 -4578260. -287354.3 711723.6 6582262. 784744.7

96563339 6607933. 267294.2 294802.0 4241505. 2422435.

(-0.717613) (-0.692843) (-1.075049) 2.414243 (1.551869) (0.323949)

0.4799 0.4951 0.2930 0.0238 0.1338 0.7488

R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic)

0.555586 0.462999 50445397 6.11E+16 -571.3131 6.000728 0.000976

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

60917263 68838922 38.48754 38.76778 38.57719 0.902172

Y = -69295145.5764 - 4578259.67153*X1 287354.294558*X2 + 711723.584682*X3 + 6582262.16741*X4 + 784744.656065*X5

8 7 6 5 4 3 2 1 0 -1.0e+08

Series: Residuals Sample 1981 2010 Observations 30 Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Jarque-Bera Probability
-5.0e+07 250.000 5.0e+07 1.0e+08 1.5e+08

-1.89e-08 -10108880 1.35e+08 -84982064 45891068 0.723289 3.948651 3.740658 0.154073

The Durban Watson statistic resulted to be 0.902172. Testing at a 5% level of significance, k being 5, it was proven that there exists positive autocorrelation within the times series data
X1 X1 X2 X3 X4 X5 1.000000 0.131880 -0.680864 0.435637 -0.372811 X2 0.131880 1.000000 -0.269949 0.348286 -0.071697 X3 -0.680864 -0.269949 1.000000 -0.798767 0.526532 X4 0.435637 0.348286 -0.798767 1.000000 -0.198285 X5 -0.372811 -0.071697 0.526532 -0.198285 1.000000

Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic Obs*R-squared Scaled explained SS

2.804444 11.06370 10.43936

Prob. F(5,24) Prob. Chi-Square(5) Prob. Chi-Square(5)

0.0393 0.0501 0.0637

Test Equation: Dependent Variable: RESID^2 Method: Least Squares Date: 05/04/13 Time: 04:48 Sample: 1981 2010 Included observations: 30

Variable

Coefficient

Std. Error

t-Statistic

Prob.

C X1 X2 X3 X4 X5

4.00E+15 -1.02E+15 -4.62E+12 1.05E+13 2.02E+14 -9.36E+13

5.94E+15 4.07E+14 1.65E+13 1.81E+13 2.61E+14 1.49E+14

0.672230 -2.515826 -0.280858 0.576897 0.773829 -0.627635

0.5079 0.0190 0.7812 0.5694 0.4466 0.5362

R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic)

0.368790 0.237288 3.11E+15 2.31E+32 -1109.376 2.804444 0.039279

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

2.04E+15 3.56E+15 74.35843 74.63867 74.44808 1.361270

A totally unbiased evaluation of the impact of the explanatory variables on FDI was not possible since the researchers had no access to primary data. Most of the results were statistically insignificant. Explanatory variables that related specifically to the Guyanese economy should have been used instead of generalized variables that affected FDI. Lagged variables should have been as was the case in the two previous studies that attained statistically significant result A larger sample along with different forms for estimation of the regression equation such as those used in John Anyanwus research could be used if this research should be taken further to obtain more statistically significant results

Analysing the model in its entirety the researchers conclude that the following can be done to enhance the model:

1.Re-specification of the model 2.Increase sample size 3. Dropping of variable(s) 4.Transformation of variable(s) 5.Applying a different regression technique

6. Additional knowledge on theory