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
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.