| The objective of this dissertation is to investigate whether trade balance is an indicator of foreign direct investments by a multinational corporation. This study addresses two principal research questions. First, what are the determinants of foreign direct investment? Second, is trade balance an indicator of foreign direct investment? If so, is there any lag effect on foreign direct investment for a specific country?;In order to accomplish the objective, I have constructed two multiple regression models. The models have their origin in the works of Dunning's eclectic paradigm, Kojima's macroeconomic model, Kravis's study on the role of trade and economic growth, and Blomstrom, Lipsey, and Zejan's examination of the role of foreign direct investment on the economic growth of a country.;There are four independent or explanatory variables and one dependent variable employed in this research. The dependent variable is the monetary size of foreign direct investment. The independent variables are GDP growth rate, trade balance, percentage change in real wages, and the average tax rate. The unit of analysis is a recipient country of foreign direct investments. This study is based on annualized time series data from 1989 through 1998 for 38 countries drawn from Africa, Asia, Europe, North America, and South America.;First, for a large number (31) of countries, the results indicate significant statistical correlation exists between the explanatory variables and the monetary size of foreign direct investments.;Second, for a majority of the sampled countries, the results indicate that the coefficient of trade balance is statistically significant at 90 percent confidence level.;Third, for 10 countries out of a sample of 26, the results indicate significant statistical correlation exists between one period large monetary size of foreign direct investment and the current period FDI.;Fourth, the results show that a multinational corporation, which is looking for location of its investments, will be better off by investing in those South American countries that are facing trade balance problems as well have been the recipient of foreign direct investments.;Finally, a multinational corporation, by investing in either exportable or import substitutable products of countries that are facing trade balance problems, will be in a stronger position to negotiate better incentives from the host countries which, in turn, will enhance the MNCs' value. |
