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direct

investment

flow

to

WAMZ

countries.

Contrary

to

expectation

RI,

the

variable

indicating the domestic cost of capital in the host country, is negatively related to foreign

direct investment. One would have expected that the high cost of domestic capital would

encourage inflow of foreign capital. However, this variable is not significant implying

that the domestic cost of capital is not a key issue in the decision of foreign investors to

locate in a particular host country in WAMZ. Also, external debt service has a negative

effect on foreign direct investment, though it is not significant at conventional levels.

The other three variables all have correct signs and are significant except for inflation

rate. Inflation rate, which was included as a proxy for macroeconomic instability, has a

negative

effect

on

foreign

direct

investment.

Uncertainty

in

the

macroeconomic

environment will obviously discourage investors from investing since it will increase the

cost of investing in the host country. So will political instability, which has a negative

correlation with foreign direct investment. On the other hand, public investment has a

positive and significant relationship with foreign direct investment.

The economic growth equation shows that increasing labour input will increase

the rate of economic growth. The other variables, namely, trade openness, foreign direct

investment and real exchange overvaluation all have expected signs, except gross

domestic investment, but not significant. This is an important finding. In particular, the

influence of foreign direct investment is negligible. The second results generated using

the GMM technique is not different from those discussed above, in terms of the signs of

the estimated coefficients. However, most of the variables such as GDPGR and DEBSR

in the FDI equation, and LAB and OPEN in growth equation become statistically

significance at 5 percent level.

18

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