Determinants of international flows: An analysis of foreign direct investments and exports

This thesis explores two types of international flows: foreign direct investment as a type of capital flow and exports as a trade flow. The first essay looks at country characteristics that attract foreign direct investment to transition economies. The second raises the question of which factors in addition to endowment affect exports from developing countries.; During the last two decades, foreign direct investment (FDI) in the world economy has increased 10 times, while trade has increased by only a factor of 3. FDI has been perceived especially in developing countries as one of the ways to promote economic growth. For transition economies which are transforming from planned into market economies, FDI is considered to be even more important. It has been thought to be the catalyst of the whole transition process by bringing in much-needed capital, by representing a channel for transferring technology and by being central for enterprise restructuring. To determine the locational characteristics that attract FDI I analyze panel data for 15 Central and East European countries in the period 1992--2003. Until now the empirical evidence has shown mixed support for low cost of labor as an attractive force for FDI, although a well-educated labor force and low labor costs has been considered the main comparative advantage of these countries at the beginning of their transition. The hypothesis tested in this paper is that labor costs, though not significant at the early stages of transition, become an attractive force for FDI once necessary conditions are created by the transition process. In addition to labor costs, I pay special attention to regional markets, and I develop new measures for different privatization methods. The results confirm the above hypothesis and show that the domestic market, the country's relative progress in transition, the use of different methods of privatization, and membership in the Visegrad group have significant effects on FDI inflow. Regional markets, which have not been previously explored in econometric studies on these countries, are shown not to play a significant role in investment decisions.; According to the export-led growth hypothesis, export expansion is one of the main determinants of growth and economic development. Heckscher-Ohlin trade theory explains comparative advantage of individual countries as arising from differences in factor endowments. Data on developing countries, however, show that there is a large amount of variation in exports of labor-intensive goods---more than what can be explained by similar endowments. We seek to explain this variation by looking for the other relevant factors in addition to factor endowments. In this way we connect two strands of literature on trade: Heckscher-Ohlin trade theory and the gravity approach. The main results are that endowments---more specifically relative abundance in low-skilled labor and capital, as well as the state of the transportation infrastructure---are of primary and about equal importance in explaining the dispersion in labor-intensive exports. Telecommunication infrastructure and land are of secondary importance, while distance and medium-skilled labor play a minor role in explaining the variability of exports in our sample.