Analysing Foreign Direct Investment (FDI): Empirical Analyses on the Impacts and Determinants of FDI

Inward foreign direct investment (FDI) can bring many potential benefits to the host economy receiving it. This thesis is motivated by the constant academic and public debate on the merits of FDI. This thesis has three standalone chapters on the theme of inward FDI and contributes further empirical evidence and insight into the effects and determinants of FDI. Chapter 1 introduces the thesis and elaborates on the motivation, findings and contributions of this thesis. Chapter 2 contributes to the scant Australian FDI studies and models the effects of inward FDI for Australia via a vector autoregressive model framework. There is debate on whether stock or flow data should be used in modelling the effects of FDI, and this chapter is a unique study that tests the robustness of the results to FDI measurement. I find FDI is beneficial to Australia, as it has a positive influence on output, employment and wages. Chapter 3 studies a panel of countries and considers a possible reason why FDI is beneficial in some cases, but not in others. The uniqueness of this chapter is in extending the microeconomic research on cultural distance, FDI and firm performance to the macroeconomic context. Using fixed effects estimation, I find inward FDI is less effective in generating output when the source and host countries are more culturally different. Thus, cultural proximity can act as an additional absorptive capacity that affects the growth-enhancing effects of FDI. I contribute to the scant literature on FDI in the services sector by analysing the determinants of FDI in China at the industry level in Chapter 4. Services FDI is driven by the growth in: wages, education, and fixed assets investment. Secondary FDI is driven by agglomeration effects, and changes in education and tariffs. The findings in Chapter 4 highlight the importance to account for the industry dimension of FDI as China transforms towards a service-based economy. Chapter 5 concludes this thesis.