FDI Empirical Results
Similar to the above results for exports, empirical FDI results show that exports positively
influence FDI. Therefore, we found a complementary relationship between U.S. FDI and
exports into our FTAA countries (i.e., Canada, Mexico, and Brazil), consistent with the findings
of Malanoski, Handy, and Henderson and Bolling and Somwaru.
Exchange rates (foreign currency per U.S. dollar) were found to positively influence FDI
and were highly significant at the 1% level. A 1% increase in exchange rates causes a 0.11%
increase in foreign direct investment. This finding is consistent with our hypothesis that as the
U.S. dollar appreciates, it will be cheaper for U.S. firms to invest in foreign countries.
Additionally, a 1% increase in foreign GDP causes a 1.05% increase in U.S. foreign
direct investment. This parameter estimate was highly significant at the 1% level and results
imply that U.S. agribusinesses invest in high income countries. The importance of GDP has
been verified by Lipsey and Weiss, Ning and Reed, Gopinath, Pick, and Vasavada (1999), and
Marchant, Saghaian, and Vickner.
Empirical results indicate that relative compensation rates (foreign compensation rate per
U.S. compensation rate) positively affect foreign direct investment. Similar results were
obtained by Barrell and Pain and Gopinath, Pick, and Vasavada. This finding was not consistent
with our hypothesis that U.S. firms tend to invest in countries with low compensation rates.
There are two possible explanations for this positive relationship between FDI and compensation
rates. First, U.S. FDI flows into developed countries–which have high compensation rates–are
higher compared to U.S. FDI flows into developing countries. This may indicate that relative
productivity is a key in FDI flows rather than compensation rates. Second, this research focused
on U.S. foreign affiliate sales in foreign countries rather than capital flows into foreign countries.