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Outlier, Measurement, and the Democracy-FDI Controversy

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  • Li, Quan

Abstract

Choi (2009) offers a useful demonstration that Li and Resnick's (2003) analysis of the effect of regime type on foreign direct investment (FDI) inflows is vulnerable to the impact of outliers. However, his first remedial method of controlling for outliers with a dummy variable leads to qualitatively the same findings of Li and Resnick. His second remedial method, a robust regression estimator, drops 80 observations and its result on democracy contradicts the finding from median regression. Choi claims that the origin of the outlier problem in Li and Resnick is the inappropriate operationalization of the concept: FDI inflows. Analysts should choose FDI/GDP over net FDI inflows. This research demonstrates how scholars often conflate the two measures conceptually and empirically. Fundamentally, FDI/GDP reflects a country's openness to or reliance on foreign capital whereas net FDI inflows indicate the amount of investment. Based on FDI/GDP, scholars cannot draw correct inferences about the impact of democracy on the amount of foreign investment. Hence, conclusions in several published studies have to be revised and corrected. One promising solution for outliers in FDI data is to log-transform net FDI inflows. This research has important implications not only for resolving the democracy-FDI controversy but also for studies of other causes of FDI flows.

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  • Li, Quan, 2009. "Outlier, Measurement, and the Democracy-FDI Controversy," Quarterly Journal of Political Science, now publishers, vol. 4(2), pages 167-181, July.
    • Handle: RePEc:now:jlqjps:100.00009028
    DOI: 10.1561/100.00009028
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    Cited by:

    1. Doytch, Nadia, 2015. "Sectoral FDI cycles in South and East Asia," Journal of Asian Economics, Elsevier, vol. 36(C), pages 24-33.
    2. Juan A. Bogliaccini & Patrick J. W. Egan, 2017. "Foreign direct investment and inequality in developing countries: Does sector matter?," Economics and Politics, Wiley Blackwell, vol. 29(3), pages 209-236, November.
    3. Doytch, Nadia, 2021. "Do FDI inflows to Eastern Europe and Central Asia respond to the business cycle? A sector level analysis," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).
    4. Rodolphe Desbordes & Vincenzo Verardi, 2017. "Foreign Direct Investment and Democracy: A Robust Fixed Effects Approach to a Complex Relationship," Pacific Economic Review, Wiley Blackwell, vol. 22(1), pages 43-82, February.
    5. Nadia Doytch, 2022. "FDI: Hot or Cold Money? The Behaviour of Sectoral FDI Inflows and Outflows Over Periods of Growth Accelerations and Decelerations," Foreign Trade Review, , vol. 57(3), pages 324-350, August.
    6. Liu, Ruiming & Kang, Yankun & Zhang, Jie, 2021. "Ideological taboos, entry barriers, and FDI attraction: Evidence from China," Journal of Asian Economics, Elsevier, vol. 76(C).
    7. Basu, Debarati & Mitra, Shabana & Purohit, Archana, 2023. "Does effective democracy explain MNE location choice?: Attractiveness to FDI and cross-border M&As," Journal of Business Research, Elsevier, vol. 167(C).
    8. Chungshik Moon & Byungwon Woo, 2022. "Curse of friendship: IMF programme, friendship with the United States and foreign direct investment," The World Economy, Wiley Blackwell, vol. 45(7), pages 2188-2221, July.

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