for the possible heterogeneity that may arise from the use of cross section in our panel of
WAMZ countries. Annual data running from 1980 to 2002 are used for the analysis.
The approach adopted in this article is to construct a simple foreign investment model
using the basic traditional investment model but augmented with control variables
commonly used for the study of investment behaviour of multinational firms. For the
growth model, the augmented neoclassical production function is used.
The general form of the traditional investment model is given by:
) , ( i t i t i t R Y f K =
i = 1,..., N and t = 1,...,T
where Kit is the desired capital stock, Yit is output and Rit is real user cost of capital in a
host country. The basic model refers to the traditional determinants of investment for
As foreign firms cross boundaries, other factors become pertinent.
Foreign investors are concerned about the political climate and host country government
policies. These factors are important because, in most cases, the treatment received by
foreign firms differ from country to country. Other macroeconomic determinants of
investment, such as total and skilled labour force, market size and potential, technology,
infrastructure, size of export sector, investors’ confidence and image of a host country in
the international business community are equally important in the location decision of
foreign firms. The importance attached to each of these factors depends on the type of
investment and the motivations or strategy of investors. With these modifications, we
arrive at an augmented foreign investment model specification as follows.
= β 11 + β 12 GDPPC
β 13 GDPGR
β 14 RI
β 15 INF
β 16 PUB
β 17 DEBSR it + β 18 POL it + λ1 t + η 1 i + ε 1