Determinants of foreign direct investment of OECD countries 1991-2001

Using a fixed-effects panel data approach, FDI flows of 22 OECD countriesare explained by gravity equations over the period 1991-2001. It isdistinguished between all available observations, Intra-EU25 observationsonly, and observations not belonging to the EU25 area in order to controlfor EU-specific effects. Regressions are repeated with exports asdependent variable in order to capture diverging influences for trade flows.Changes in total market size and relative market size are important factorsthat lead both FDI and exports in the same direction. However, relativemarket size is only significant in the FDI equation when variation betweenthe EU25 area and other investment is taken into account, thus indicating aconcentration of FDI within Western and Central Europe. Stock marketbooms boost FDI but not exports. Differences in significance levels/signs ofcoefficients of political indicators and exchange rate changes indicate thatexports are demand-driven while FDI is supply-driven. Year dummiesinteracted with country distance show that, overall, FDI and exports tendedto flow less to distant countries over the period under consideration.However, this trend is reversed for exports within the EU25 area.