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Title: Effects of government policies on direct private foreign investment in the manufacturing industries
Author: Salas Harms, H. J. F.
Awarding Body: Manchester Business School
Current Institution: University of Manchester
Date of Award: 1980
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This proj ect was aimed speci fically at determining empirically and quantitatively the impact of the 'host government policies to promote and control Manufacturing Direct Foreign Investment (DFI) on the inflows of Manufacturing DFI. To achieve this, an econometric multivariate model of the country-related determinants of DFI - a 'Basic Model' - Was developed in order to control for the countryeffects on the dependent variable. The statistical analysis of data Was carried out by means of the Ordinary Least-Squares regression technique on a cross-sectional basis. The basic model was the equation linking flows of Manufacturing DFI with market size, environmental risk and proximi ty (of the investor to the foreign market).. Two government policy variables were added to this basic model, namely, controls 'on DFI and effective tax burden. Controls on DFI was an indicator obtained by determining the score on a three-point scale of two poltcy areas: policy area A 'degree to which economic activity is closed to foreign control or participation' and policy area B 'degree of restrictions on the repatriation of profits and capital'. Each policy area consisted, in its turn, of two policy items. The effective tax burden was measured as the percentage of taxes per unit of ,revenue pro rata for the foreign parent which would apply to a firm' wi th certain parameters after considering all taxes on income, dividends, capital, capitalization, tax incentives and tax treaties between the investor and host countries in the sample. A comprehensive survey of the previous quantitative and non~ .. quantitative research on the determinants of DFI was carried out. Likewise, a comprehensive review of research on the measurement of such determinants was carried out. The quantitative analysis included tests to determine: a) the validity of using proxy variables, b) the most suitable indicator for the variabl es 0 f the basic model, and c) the form 0 f the relationship - selecting the linear form. The individual impact of the variables of the basic model was tested. Three variants of the basic model were developed to eliminate the observed multicollinearity and the dominant role of market size. subsidiary tests were carried out to explore the relationships between the independent variables. The relationships hypothesized in the basic model were tested in an ex ante fashion with a fUrther set of data. We obtained a model - variant one - which explained nearly twothirds 0 f the variance 0 f flows 0 f fvIanufacturing DFI with all ratios highly significant and no outlier residuals in terms of an inveetment potential variable - obtained by adjusting the size of the market by the environmental risk - and a nroximity variable - obtained by weighting a proxy for the psychic distance between the investor and host countries with its related geographic distance measured on a three-point scale. A statistically significant negative relationship was established between controls on DFI and the dependent variable in variants two and . t·hree. This relationship was established also at a higher level of ii s~gnificance and with a larger contribution of controls on DFI to the R for a subsample of the non-OECD countries in the original sample with the basic model and variant 3. A statistically significant relationship was not established between the effective tax burden and flows of Manufacturing DFI. Results which were consistent with these were obtained in a replication of this test carri.ed out with a further set of data. Subsidiary tests Were carried out with a corporate tax rates variable and with two proxies for the level of development and wealth of a country, to explain these results.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: Economics & economic theory Economics Political science Public administration