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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.


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