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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.

3.1

Model Specification

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 =

(1)

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

domestic investors.

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.

FDI

it

= β 11 + β 12 GDPPC

it

  • +

    β 13 GDPGR

it

  • +

    β 14 RI

it

  • +

    β 15 INF

it

  • +

    β 16 PUB

it

(2)

  • +

    β 17 DEBSR it + β 18 POL it + λ1 t + η 1 i + ε 1

14

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