Spring 2017 its gradual opening up from State Owned Enterprises (SOE) to Joint Ventures (JV) and finally to Wholly Owned Foreign Enterprises (WOFE) significantly increased its FDI inflows. A significant coefficient of Ownership suggests that it indeed is a factor considered by foreign investors. Its negative value can be explained by taking a closer look at the trend of the ownership observations. In all but 2 of
“More specifically, many South American countries embraced import substitution industrialization strategies until the late 1980s” the 79 countries in the sample (Sri Lanka and Vietnam), the scores of ownership in the first period (2000-2002) are higher in than the last period (2012-2014). Therefore, it can be inferred that the relaxation of foreign ownership environment of the countries in the sample is not captured between 2000 and 2014. Simply put, in all but 2 of the 79 countries in this study, foreign ownership of domestic companies is generally more relaxed and prevalent in 2000-2002 than in 2012-2014. This can explain why the coefficient on ownership is counterintuitive. Meanwhile, the value for the business regulation index is significant only in the qualitative model and is negative in both. This result is consistent with the findings of Quazi (2007) who found a significantly positive correlation between FDI inflows and more repressive regulation. Of the nine countries studied by Quazi, only Mexico and Argentina experienced less repressive regulations whereas the seven remaining countries in the sample are heavily regulated. An explanation that the author provides is that even the seven countries received far higher FDI inflows and that is what is captured by the estimation. Moreover, seven countries scored higher in other FDI-inducing measures which arguably could have offset the heavy regulation scores. Similar to the case of Quazi (2007), the majority of the
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countries in the sample of this study are heavily regulated, but my findings suggest that more heavily regulated countries received more FDI inflows. In fact, less than five percent of the sample experienced relaxed business regulation over the fifteen year period. It is possible that the effect of heavy regulations is offset by other FDI inducing incentives. Furthermore, Ownership and Regulation are both found to have nonlinear effects on FDI inflows as will be discussed in detail in the following subsections. The general rule that the number of instruments must be less than or equal to the number of groups is satisfied by both models. Moreover, another important diagnostic test in Dynamic Panel Data estimation is the Arellano-Bond Test for Autocorrelation of the Residuals [AR(x)] where the null hypothesis is “no autocorrelation of order x”. The AR (1) results suggest that if the residuals are uncorrelated, their first differences are expected to be correlated so in this case, AR (2) test will better identify serial correlation of the residuals. Based on the figures reported in Table 3, both quantitative and qualitative model showed no signs of first order serial autocorrelation. Meanwhile, the Sargan and Hansen tests are indicative of the exogeneity of the instruments with the null hypothesis being: “the instruments as a group are exogenous”, which should be rejected by obtaining a high p value. In both tests, the apparent failure to reject the null hypothesis gives support to the model. An overall consideration of the Sargan and Hansen p-values suggests that the instruments are effective and valid. The coefficients for both quantitative and qualitative System GMM estimations satisfy the Fixed Effects < Generalized Method of Moments < Random Effects condition for effective GMM estimators (Blundell and Bond, 1998).
tive model builds on the model used by Adams (2010). The variable of interest, IPR index, has a positive and significant marginal effect on FDI inflows. This is the intuitively expected relationship between IPR and FDI and is consistent with the studies of Adams (2010), Smarzynska (2004), Khan & Samad (2010), Maskus (1998), and Mansfield (1995). The empirical results provide substantial evidence that improvements in the formulation and enforcement of IPR laws and the overall bureaucratic climate of IPR regimes will positively and significantly affect FDI inflows. Smarzynska (2004) suggests a positive relationship between IPR and foreign investments in a firm-specific sample from high technology sectors. This result is used to induce the argument that IPR protection benefits not just high technology sectors but also firms from other industry because IPR can be interpreted as a signal. Mansfield (1995) also reports a sector-specific study on IPR-FDI link and finds that industries such as the chemicals, pharmaceuticals, and electri-
5.1 Results Using IPR Index Following all available studies discussing the IPR-FDI link, this paper estimated the IPR-FDI relationship using the conventional approach—that is, using a qualitative index of IPR protection. Table 5 shows the estimation result of the model using IPR Index (IPRI) as a proxy for IPR. This data is a sub-component of the Economic Freedom of the World Composite Index. For comparison purposes, three different techniques—fixed effects (FE), random effects generalized least squares (GLS), and SGMM are used. The qualita-
cal industries benefit most from transfer of technology brought about by FDIs. A region-specific study is conducted by Khan and Samad (2010) who find that in 14 Asian and Southeast Asian countries, stronger IPR regimes increase the likelihood of FDI in manufacturing and retail sectors. Meanwhile, a study by Seymour (2006) uses both developed and developing countries and reports a significant positive effect of patent protection on FDI. This study uses developing countries and the empirical results are consistent with those mentioned.
Columbia Economics Review
“Of the nine countries studied by Quazi, only Mexico and Argentina experienced less repressive regulations whereas the seven remaining countries in the sample are heavily regulated.”