Seon Brathwaite

10/0833/1672

Abstract

The main hypothesis of this practicum paper is that Guyana has on average
lower FDI inflows than the other founding members of Caricom namely;
Barbados, Jamaica and Trinidad and Tobago. The purpose of the paper was
to identify the most significant determinant of these inflows using time
series data. The OLS method was used to estimate the equation using the
Eviews statistical too package. The Result showed that out of the six
selected variables only two were significant namely; trade openness and
income per capita. The test for multicollinearity showed that it was present
in the model; however this went untreated, because a model is expected to
have some degree of this. There was no autocorrelation and the model was
not good enough for forecasting since its mean absolute error was very
high.

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Acknowledgements

The researcher thanks above all else the creator for the will, wisdom and
endurance specifically for the completion of this task. Subsequently i thank
my lecturer Ms Diana Glasgow for her guidance and ideas to explore, all to
ensure quality work. Several students also played a contributing role in this
area of guidance and suggestion of ideas that included, in no particular
order, Akeem Hinds, Rawle Ramsammy, Stefon Wong and Onika Beckles. I
express my gratitude for their significant inputs. Finally but probably most
importantly, the researcher also express his gratitude to the kind
cooperation of a few staff members of the Bank of Guyana that provided me
with most of the necessary data that were a bit troublesome to access
online. Sincere appreciation goes out to all for their contributions. Thank
you.

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Content Page

Contents
Page

Abstract
.1

Acknowledgement
2

Introduction..
5-7

Background
5
Introduction5
-6
Statement of
problem.7
Aim and
Objectives7
Structure of
paper..7

Literature Review
8- 11

Data Collection
..12

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Data Analysis.
.13-14

Justification of Software
used14

Formulation of the general model.

15- 22

Findings and Interpretation of

results............................................................................................23 - 30

Conclusion.31
32

Limitations.
.33

References
.34 35

Appendices
36 - 44

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List of Appendices
Raw Data Used for the study...
36
OLS regression equation results..
.37
Correlation Matrix and the Variance Inflation Factor.
..38
Line fit plot showing linearity..
.39
Histogram showing if residuals are normally distributed...
40
Whites Heteroskedasticity test results..
..41
Ramsey Reset test Results42
Forecast for 2011 - 2013 Results..
43
Table showing average FDI for founding members of Caricom 2003-
2012.44

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Introduction

Background

Foreign Investment in Guyana, was heavily promoted under the leadership

of President Hoyte, his government's plan was to revitalize Guyana's
economy after two decades with all companies being nationalized. The
government found it difficult in the early 1990s to convince foreign
companies that investments in Guyana would be safe and lucrative. The
government stated investments were safe because, "The objective
circumstances which led to nationalizations during the 1970s no longer
exist and the present government has no plans whatsoever to nationalize
investment or property." Though foreign investment had begun to flow into
Guyana by 1991, many potential investors remained hesitant. One concern
was that a change in government could reverse the favorable policies that
the Hoyte government had introduced. The Hoyte government maintained
that it was planning to change the constitution to remove sections that
discouraged potential investors. Other concerns for investors were the lack
of infrastructure, the shortage of skilled labor (even though wages were
low) and the politicized and strike-prone unions.

Guyana offers an adequate legal framework for foreign investment, but

implementation of relevant legislation remains inconsistent and sometimes
deficient. The Investment Act of 2004 seeks to stimulate socioeconomic
development by attracting and facilitating foreign investment. Other
relevant laws include the Income Tax Act, the Customs Act, the
Procurement Act of 2003, the Companies Act of 1991, the Securities Act of
1998, and the Small Business Act. Regulatory and administrative actions
are still required for much of this legislation to be effectively implemented.

Introduction

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The term investment, to economists, means the production of goods that

will be used to produce other goods. It is the act of placing capital into a
project or business with the intent of making a profit on the initial placing of
capital. An investment may involve the extension of a loan or line of credit,
which entitles one to repayment with interest or it, may involve buying an
ownership stake in a business, with the hope that the business will become
profitable. Investing may also involve buying a particular asset with the
intent to resell it later for a higher price. Investment is the means by which
a country preserves and enhances its productive potential which means that
it is a major source of demand for output. It is one of the most important
variables in economics. The surges and collapses of investment is still a
primary cause of recessions. One cannot begin to project where the
economy is going in the short term or the long term without having a firm
grasp of the future path of investment. Because it is so important,
economists have studied investment intensely and understand it relatively
well. To further justify its importance, investment plays major
macroeconomic roles in that:

It contributes to current demand of capital goods, thus it increases

domestic expenditure.
It enlarges the production base (installed capital), increasing
production capacity;
It modernizes production processes, improving cost effectiveness;
It reduces the labour needs per unit of output, thus potentially
producing higher productivity and lower employment;
It allows for the production of new and improved products, increasing
value added in production;
It incorporates international world-class innovations and quality
standards, bridging the gap with more advanced countries while
increasing exports and encouraging active participation in
international trade.

A countrys total investment incorporates both domestic and foreign

contributors. However the researchers will specify the focus of their study
to foreign direct investment.

This study has been narrowed down to Foreign Direct Investment since it
has a major role to play in the economic development of Guyana. Over the
years, FDI has helped underdeveloped economies of the host countries to
obtain a launching pad from where they can make further improvements. It

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is an important vehicle for the transfer of technology, contributing relatively

more to growth than domestic investment.

Economic theory postulates, ceteris paribus, that foreign direct investment

in an economy is said to be influenced by the world interest rate, size of the
host market, the real exchange rate relative to the US dollar, political
climate, cost and quality of human resource, natural resources, presence of
rival firms, infrastructural factors, per capita national income, Real Gross
Domestic Product growth rate, taxes, economic policies, membership of
international trade agreements, rate of return, openness of the economy
and economic stability. The researcher however seeks to identify which of
the preceding factors explains variations in foreign direct investment in
Guyana to the greatest extent. In order to do this the researcher is building
an econometric model, regressing a few of the most significant variables on
to the level of foreign direct investment in Guyana from the rest of the
world to explain its likely variations and perhaps to give further insight into
the other factors aforementioned with regards to its contributions to the
economy and its use as a measuring stick of a nations economic state and
where its inclined to end up as a result.

Statement of the problem

The inflow of foreign direct investment to Guyana is very low (Check

appendices for a table showing averages) compared to the other three
founding members of Caricom namely; Trinidad and Tobago, Jamaica and
Barbados. The question is why it is very low and what are the factors that
determine the FDI inflows to Guyana. Using time series data analysis, will
allow for a determination of the most significant factors impacting FDI.

Aim of the study

The aim of this study is to determine the factors that influenced the Inflows
of FDI during the period 1981- 2010

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Objectives of the study

To determine the factors that influence FDI inflows in Guyana

To determine if autocorrelation and multicollinearity is present in the
proposed Model
To determine whether or not the proposed model is good enough for
forecasting

Structure of the Paper

The researcher looked at several pieces of literature for guidance,

knowledge of other such studies and to validate their approach. In the first
stage, these papers will be summarized and put into perspective; their
hypothesis, process of approving or disapproving it and their conclusions,
just to give other viewpoints of our study. The second stage is where we
formulate our general model defining our variables incorporated, their
justification for use, and their expected signs. Stage three consists of model
specification and the expected signs of the variables chosen. The fourth
stage is where the specified model of FDI in Guyana will be estimated using
Eviews. The logged form of the model will also be run. Several first order
and second order tests will be run and used in further analysis. Stage five is
where the analysis of the tests results will be made. The results will be
interpreted, rationalized and necessary conclusions drawn with respect to
this study. The sixth stage then states every possible hiccup faced in the
conclusion of this study, from its commencement to conclusion. Possible
suggestions will be given to address those issues for future studies. In
stages seven and eight, the references will be recorded and the appendix
with the necessary graphs, tabular displays etc. will be included,
respectively.

Literature Review

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The pioneering study on Foreign Direct Investment can be attributed to

Stephen Hymer (1960), in which he described FDI as asset transfer by the
formation of subsidiaries or affiliates abroad, without loss of control.
Foreign Direct Investment can also be described as investment of foreign
assets into domestic structures, equipment, and organizations which does
not include foreign investment into the stock markets.

Defined by the world bank Foreign direct investment are the net inflows of
investment to acquire a lasting management interest (10 percent or more of
voting stock) in an enterprise operating in an economy other than that of
the investor. It is the sum of equity capital, reinvestment of earnings, other
long-term capital, and short-term capital as shown in the balance of
payments.

Multinational Enterprises (MNEs) have two major reasons for investing

abroad which are horizontal motivations (where firms look to replicate their
operations in other countries to be more near to consumers in those
markets) and vertical motivations (where firms look for low-cost locations
for labour-intensive production) (Blonigen and Pige, 2011).

In their paper The determinants of foreign direct investment into

European transition economies, Alan Bevans and Saul Estrins
(2004) major aim was to use panel data on bilateral flows from individual
source to host economies between 1994 and 2000 to analyze empirically the
determinants of inward FDI to Central and Eastern European Countries
(CEEC) by focusing on proximity, concentration advantages, and factor
costs. They saw the need for this study since the economies of the CEEC
represent a useful laboratory to test hypotheses about the determinants of
FDI because such flows were virtually unknown before the fall of
Communism in the early 1990s and the host countries are differentiated by
size, level of economic and institutional development, and proximity to
Western Europe. Several empirical studies of FDI into transition economies
use aggregate inflow data or enterprise surveys. Others focus on particular
issues such as investigating the impact of institutional factors on FDI. Few
studies investigate bilateral flows or use panel data methods to investigate
whether FDI is motivated by factor cost or market opportunity.

The data set for the model covered the period 1994 2000 and the selected
host countries for FDI inflows were Bulgaria, the Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic, Slovenia

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or Ukraine, while the sources countries were the EU 14 with Belgium and
Luxembourg merged Korea, Japan, Switzerland or the US. The variables
that the authors thought best for determining the flows of FDI are GDP for
host and source countries, unit labour cost (ULC) for host countries,
distance between host and source countries, interest rate differential
between source and host countries, trade in host country, and risk
associated with host country.

The study carried out used two linear regression equations and the
coefficients for both equations were estimated using one year lagged
explanatory variables and contemporaneous explanatory variables since
some of the information became available only with a lag, e.g. risk or unit
cost. Random effects were used when estimating the equation since
Hausman specification tests do not support the use of fixed effects.

After running the first regression equation the results showed that the
positive and significant coefficients for source and host GDP and the
negative and significant coefficients for distance indicate that FDI is
determined by gravity factors They also found that unit labour costs are
negative and significant indicating that FDI flows are greater to locations
with relatively lower unit labour costs, independent of distance or host
country size. This supports the hypothesis that foreign investors are cost
sensitive. In addition FDI and trade are complementary because countries
having higher trading shares with EU countries also receive significantly
more FDI. However this result holds only in lagged specification indicating
that FDI decisions rely on past, rather than contemporaneous, information
about the host economies. For all other variables, the estimated coefficients
and the standard errors are robust using the current or lagged
specification. However the fit of the equation is better in lagged form, which
suggests that current FDI flows rely on lagged information rather than on
contemporaneous information.

Contradictory to economic theory FDI flows to these transition economies

are not influenced significantly by market evaluations of country-specific
risk. The simple correlation coefficient between the risk measure and FDI is
positive and significant even though the risk effect becomes insignificant
when the other variables are included in the regression.

When running the second regression equation which included the dummy
variable to represent positive announcements about prospective EU
membership, the writers found that the common variables between the two

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equations have coefficients that are very similar in sign, significance and
value. The overall measures of fit and significance are also similar. The
cologne announcement dummy is positive and significant in both current
and lagged formulations. Therefore they concluded that EU announcements
about potential accession have significant independent effects on FDI flows
to transition economies by increasing FDI to countries whose likelihood of
accession is enhanced, even after controlling for gravity factors. Moreover,
the insignificant coefficient on the risk variable changes sign, which is
consistent with the conjecture that investors use the accession as a signal of
creditworthiness.

Another piece of literature that is related to this research is the case study
Why Does Foreign Direct Investment Go Where It Goes?: New
Evidence From African Countries done by John Anyanwu. In his
research to empirically determine the factors that influence net FDI inflows
he used 16 explanatory variables. These variables are urban population,
Gross Domestic Product per capita, inflation rate, exchange rate, Gross
Domestic Product growth rate, financial development, openness,
infrastructure, human capital, Aid, first lag of FDI, corruption, regulator
quality, rule of law, oil exports and the dummy variable regions which is a
binary variable representing all the different regions of Africa..

The data set used in the empirical analysis is cross sectional and constitutes
annual data from 1996-2008 for 53 African countries. All the variables are
expressed in natural logarithm except the dummy variable since this
reduces the risk related to heteroskedasticity which is common in cross-
country analyses. The author decided that since his sample consisted of
cross sectional data he would perform four different empirical techniques to
strengthen his empirical results.

First, he performed robust pooled ordinary least squares (OLS). Secondly,

feasible generalized least squares (FGLS) for the cross-sectional time-series
linear model was used. This method allows estimation in the presence of
AR(1) autocorrelation within cross-sectional correlation and
heteroskedasticity across panels. Third, for robustness check, he took
cognizance of the view that FDI decision may be made based on historical
data and hence all the independent variables that are supposed to have
effect on FDI inflow would materialize their effect the next period onward.
Therefore, all the independent variables are lagged by one period for all
variables and re-estimated by OLS/FGLS methods. Fourth, for further
robustness and to take care of any possible endogeneity in the aid variable,

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Anyanwu used the two-step (IV) efficient generalized method of moments

(GMM) estimation method on the lagged specification.

After running the regression equation using the first method of robust
ordinary least squares it was found that the urban population has a
significant positive relationship with FDI inflows to Africa although GDP per
capita did not have a positively significant association with FDI inflows. On
the other hand openness is positive and highly significant in affecting FDI
flows while the negative significance of the variable financial development
in African countries leads to less FDI inflows. The amount of foreign aid
flowing into African countries and the amount of natural resource
endowments, such as oil, have a positively significant impact on FDI. The
sub-regional dummy variables are highly statistically significant when
related to FDI inflows while all the other variables were found to be
statistically insignificant in attracting FDI flows.

Another method that was used is the robustness checks using lagged data
with OLS and FGLS results. When the regression equation was ran
employing this method with all the explanatory variables lagged it was
found that the results confirmed the continued significance of urban
population, trade openness, financial development, natural resource
endowment (oil) and foreign aid. The sub-regional dummy variables were
also found statistically to be significant. The only significant change in the
results found was that the variable rule of law is statistically significant in
its association with higher FDI inflow to Africa while the results for the
statistical significance of corruption and regulatory quality remain the
same.

The final method employs the two-step (IV) efficient generalized method of
moments (GMM) estimation method on the lagged specification. This
method was utilized since Anyanwu felt that the regression equation had
one possible problem which was that it assumed that all of the right-hand
side variables (explanatory) in the model including foreign aid are
exogenous to FDI inflows, even when the lagged independent variables are
used. He felt that it was possible foreign aid may be endogenous to FDI
inflows.

The paper Determinants of Foreign Direct Investment in

Ghana by G. Kwaku Tsikata,Yaw Asante and E. M. Gyasi. Its principal
objective is to investigate the factors which determine the flow of FDI to
Ghana and to provide recommendations which will facilitate policy

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formulation and implementation. Three research methodologies were used

in the study, namely, econometric time series, a questionnaire survey and
interviews .. In terms of obstacles, uncertainties in the economy, exchange-
rate instability, exorbitant interest rates, bureaucratic red tape at the ports,
inadequate supply of utilities, especially electricity and water, and the
gradual emergence of market pollution in terms of shoddy goods
repackaged under reputable company brands are among factors inhibiting
FDI inflows. While political instability appears not to be crucial to the
foreign investor, the experience of the domestic investors makes them
concerned about the need for stability.

The final piece of literature reviewed is Determinants of Foreign Direct

Investment Inflows to Sub-Saharan Africa: a panel data analysis a
paper done by Tesfanesh Zekiwos Gichamo, the main objective of the
paper was identifying, the key determinants of foreign direct investment.
When compared to other parts of the world, attracting foreign direct
investment is poor in Sub-Saharan Africa. This study focuses on identifying
the determinants of foreign direct investment inflow into Sub-Saharan
Africa. The study used panel data analysis to investigated the determinants
of FDI stock inflow into Sub Saharan Africa. Three panel data analysis
methods used in the study: pooled ordinary least square method, fixed
effects method and random effects method. Fixed effect method was found
to be the appropriate method based on an F test and the Husman test. The
eight explanatory variables were; trade openness, Gross domestic product,
GDP per capita, GDP growth, Telephone line (per 100 people), Gross fixed
capital formation, inflation and the lag of FDI . Fourteen (14) countries were
sampled since it is not feasible to include all Sub-Sahara African countries,
due to limited availability of data. The data covered was for the period
1986-2010. The findings show that trade openness, gross domestic product,
inflation, and lag of FDI are the most significant determinants of foreign
direct investment inflows to sub-Saharan Africa.

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Data collection

Research is basically divided into two forms of Data which are

quantitative and qualitative. Qualitative data deals with the quality and
numbers for its analysis. Quantitative data deals with numbers. There are
two methods through which a data collection could be followed which are
Quantitative analysis and qualitative analysis. Qualitative data is best when
the research is based on natural settings and the research is based on
everyday happening. On the other hand quantitative data is based on
numerical data which can be used for analysis of data and test the
significance and the end result is presented in the form of graphs and
tables. Quantitative data is best used when research needs comparison. So
with this it is clear that quantitative method was the most appropriate
method for the research topic.

Secondary data collection

Secondary data collection was done by the researcher, to gather data
relevant to the study area Foreign Direct Investment inflows. Secondary
research is based on data collected through second hand data which have
already being published in the form of journals or articles or past research.
The data collected is in the same field of research and which has been
worked on previously. It is always justified that secondary data is more
reliable, effective and appropriate than primary data to research to an end
result. There have been in depth studies done on the selection criteria for
secondary research. Secondary research can be defined as the information

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gathering tool through literature from past researches, publications,

broadcasting media or non-human. Secondary research data is usually
collected in the past for some other research. These data collected could be
used use in the current form or even be worked by comparing with the new
data for understanding and reaching to an end result for better analysis.
Secondary research is easy to access and conduct as compared to primary.
Data Sources
The United Nations Commodity Trade Statistics (COMTRADE) database
World Bank (2013) World Development Indicators

Data analysis
Quantitative Analysis
Quantitative analysis is generally associated with numbers and statistics for
presenting the observations and findings in the research process. The
findings of the research in this method of analysis could be directly
compared and a comparison between quantities can be obtained for
achieving the set objectives. Quantitative analysis helps the researcher in
building relationship between different variables and attributed associated
to the research for arriving at the set objectives. Though the findings from
the data analysis are less detailed than that arrived from the qualitative
analysis. So the quantitative analysis is ideal in cases of data and side line
occurrences. In other words quantitative analysis can be defined as a tool
which seeks envision on behavior by using complex mathematical models.
Measurement and research in quantitative analysis can be defined by
allocating numbers and values to the findings.

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The tool selected for Quantitative data analysis is EViews and presentation
of data would be in the form of graph and tables. The data will be treated
under the condition of the (OLS) Ordinary Least squared method.

Justification of Software Used

In order to successfully estimate this model the researcher made use of the
software Eviews.

Why? Eviews provides sophisticated data analysis, regression, and

forecasting tools on Windows based computers. With Eviews you can
quickly develop a statistical relation from your data and then use the
relation to forecast future values of the data.
Eviews is a useful tool for scientific data analysis and evaluation, financial
analysis, macroeconomic forecasting, simulation, sales forecasting, and cost
analysis.
Eviews has many advantages such as it provides convenient visual ways to
enter data series from the keyboard or from disk files

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To create new series from existing ones,

To display and print series

To carry out statistical analysis of the relationships among series.

Eviews also has the advantage of the visual features of modern Windows
software and also results appear in windows and can be manipulated with
standard Windows techniques.

Given the above advantages the researchers found it best to use Eviews as
it suits the necessary criteria as well as it is a well-respected software used
by many to estimate models with significant impacts.

Formulation of General model

FDI= f (i, , e, NR, GDPGR, MS, PC, HR, PRF, IF, YPC, t, EP, MTA, ROR,OP)
where:
FDI: Foreign Direct Investment
i: World Interest Rate
inf: Inflation Rate
exc: Real Exchange Rate relative to the US dollar
NR: Natural Resources
GDPGR: Real Gross Domestic Product Growth Rate

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M S: Market Size
PC: Political Climate
HR: Human Resources
PRF: Presence of Rival Firms
IF: Infrastructural factors
YPC: Income per capita
t: Taxes
EP: Economic Policies
MTA: Membership of International Trade Agreements
ROR: Rate of Return
TO: Openness of the economy

The level of general investment (including foreign direct investment) and

the world interest rate have an inverse relationship. If the world interest
rate were to increase it would mean that the cost of obtaining funds to buy
capital goods for general investment has increased which will discourage
persons from investing. On the other hand, if the world interest rate falls
the cost of buying capital goods through borrowed funds has decreased this
would encourage persons to invest since the opportunity cost of investing
has decreased (Mankiw, 2009).
The size of the host market, which also represents the host countrys
economic conditions and the potential demand for their output as well, is an
important element in Foreign Direct Investment decision-makings.
Moreover, market size is important because a large market allows the firm
to maintain lower marginal costs of production through integration and
economies of scale. There are also fixed costs associated with FDI which are
easier to deal with when spread over a larger volume of output. Buckley and
Dunning, (1976) found that the larger the market, the greater the reduction
in the marginal costs of producing abroad and the more likely the firm will
invest in that location rather than resort to exportation

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The population of a country plays an important role in attracting foreign

investors to a country since the investors are lured by the prospects of a
huge customer base. It is normally assumed that if the country has a big
market, it can grow quickly from an economic point of view and it is
concluded that the investors would be able to make the most of their
investments in that country. Globerman and Shapiro (2003) found market
size to be statistically the most important predictor of whether a country
will receive FDI as well as the amount it receives.
Besides the size of the host market, the level of per capita national
income is an important variable in determining the level of foreign direct
investment. For instance, if the host country has a high per capita income
or if the citizens have reasonably good spending capabilities then it would
offer the foreign investors a wider scope of excellent performances since it
is assumed that the citizens will have more disposable income to spend on
goods.
Klein and Rosnegren (1994), and Jeon and Rhee (2008) found strong
evidence that relative wealth significantly aects inward foreign direct
investment while Brahmasrene and Jiranyakul (2001) found that real
income is a significant factor determining the inflows of FDI into a country.
Additionally the real exchange rate of a country can determine whether
or not a foreign business entrepreneur will invest in a country. For instance
if the value of the Guyana dollar depreciates relative to the US dollar the
cost of labour and production costs are expected to be cheaper. Because of
this depreciation in the exchange rate the overall rate of return to
foreigners contemplating investing in Guyana has improved, therefore
foreigners will seek to invest in Guyanas economy as the real exchange rate
depreciates. A weaker real exchange rate might be expected to increase
vertical FDI as firms take advantage of relatively low prices in host markets
to purchase facilities or, if production is exported, to increase home-country
profits on goods sent to a third market. Froot and Stein (1991) find evidence
of the relationship: a weaker host country currency tends to increase

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inward FDI within an imperfect capital market model as depreciation makes

host country assets less expensive relative to assets in the home country.
Blonigen (1997) makes a firm- specific asset argument to show that
exchange rate depreciation in host countries tend to increase FDI inflows.
But on the other hand, a stronger real exchange rate might be expected to
strengthen the incentive of foreign companies to produce domestically: the
exchange rate is in a sense a barrier to entry in the market that could lead
to more horizontal FDI.
Furthermore foreign investors are also concerned about the political
climate of the country they are going to invest in. A volatile political
climate will discourage investors since the return on their investment would
not be secure. In instances where there are riots and protests because of
the political situation in a country, workers productivity will decrease which
means that the investors will not have high rates of return on their
investment and will seek other investment opportunities in other countries
that are stable. Political instability and the frequent occurrences of disorder
create an unfavorable business climate which seriously erodes the risk-
averse foreign investors confidence in the local investment climate and
thereby repels FDI.
A study by Habib and Zurawicki (2002) measured political stability by
Political Risk Services Inc.s Political Risk Index (2000) which assigns a
number on a scale from 0 to 100 to each country with 100 being the most
stable. They found political stability to have a significant, positive effect on
FDI.
For countries currently in the process of privatization, it can be extremely
harmful if the government remains too involved in firm affairs. Such actions
compromise the authority of the courts (when enforcing contracts), and
they diminish government credibility, sending a negative signal to MNEs
and possibly deterring them from investing in those countries (De Castro
and Uhlenbruck, 1997).

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The cost and quality of human resource is a vital factor in determining

foreign direct investment since labour cost has always been argued to be a
major component of total production cost and of the productivity of firms.
Foreign investors would be disinclined to invest in Guyana if their
investment included labour-intensive production activities where the
minimum wage is high in comparison with other countries. Lower labour
and capital costs can be major determinants of location choice in the
investment decision. In order to maximize profits, production will be located
where costs are the lowest: this depends on the availability and cost of
inputs, the efficiency at which these are turned into outputs, and the costs
of moving from production to marketing. Production costs are particularly
influential on the investment decision of efficiency-seeking firms (Dunning,
1973, 1998). On the other hand, investors would have an incentive to invest
if the labour force is well-educated and thus regarded as trainable and
hard working. Higher levels of labour force education have been linked to
higher growth rates, and by that effect, to higher levels of FDI. A study on
industrial and labour relations and their affect on FDI found that average
years of education are positively associated with FDI (Cooke, 1997).
The abundance of Natural Resources is one of the major inducements to
invest in less developed countries. Guyanas endowment of extensive
savannahs, productive land and forests, rich mineral deposits of gold,
bauxite and diamonds, abundant water resources and Atlantic coastline,
presents dynamic business opportunities across multiple sectors of the
economy. If a particular country has plethora of natural resources it always
finds investors willing to put their money in them. A good example would be
Saudi Arabia and other oil rich countries that have had overseas companies
investing in them in order to tap the unlimited oil resources at their
disposal.
In his paper Location and the Multinational Enterprise: A Neglected Factor?
Dunning (1998) concluded that not only is the price and quality of natural
resources important, but also the availability of local opportunities for

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upgrading the quality of resource inputs and the processing and

transportation of their outputs are also important. Ideally, a host country
would also have local partners available to promote knowledge and/or
capital-intensive resource exploitation in conjunction with the multinational
enterprise.
Besides natural resources, economic policies also determine the level of
foreign investment coming into a country. When foreign investors receive
the same treatment as local entrepreneurs they are enticed to invest in that
country. These incentives include a flat business tax rate, tax holidays,
waivers of customs duties, export tax allowances, and unrestricted
repatriation of profits, as well as additional incentives in priority export
sectors. It has been observed in recent years that a couple of countries
have altered their stance concerning overseas investment. They have reset
their economic policies in order to suit the interests of the overseas
investors. These companies have increased the transparency of the legal
frameworks in place. This has been done so that the overseas companies
can understand the implications of their investment in a particular country
and take the appropriate decisions. Furthermore, effective support to
investors before, during and after an investment has been realized also
serves as an inducement for foreign investors.
Another important variable that determines Foreign Direct Investment is
the presence of rival firms in host country. Also, a greater volume of
MNEs in a location serves as a signal to other investors unfamiliar with that
territory and induces more firms to invest or locate affiliates in that area
(Hirsch, 1976). The presence and competitiveness of rival firms is a major
investment motivation for market-seeking firms (Dunning, 1998). Often,
when a firm is a first-mover in investing or establishing a production site in
a country, its rivals can counter the threats to their market positions by
following it to that country (Caves 1996).
Infrastructural factors like the status of telecommunications and
roadways play an important part in driving foreign investors to come into a

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particular country. It has been observed that if the infrastructural facilities

are properly in place in a country then that country receives a substantial
amount of foreign direct investment. If a country has extended its arms to
overseas investors and is also able to get access to the international
markets then it stands a better chance of getting higher amounts of foreign
direct investment.
Studies by Musila and Sigue (2006) on FDI show that FDI in Africa is
dependent on the development of infrastructure. Also, other studies on
developing countries emerging economies, Western Balkan Countries and
Southeast European Countries show the significant role of infrastructure
development in attracting the inflows of FDI.
Another important variable that determines investment is the Real Gross
Domestic Product growth rate. Conventional theory suggests that
countries with high economic growth rates and expanding markets will
attract more FDI. An increase in real GDP implies that output and the
capacity utilization of an economy have increased and as a result general
capital investment including business fixed capital investment will increase.
Emerging markets are a major attraction to MNEs because they can
establish a first-mover advantage in those locations, so it is expected that
high growth rates willpromote an increase in U.S. FDI.
Chowdhury and Mavrotas (2006), using data for three countries, Chile,
Malaysia and Thailand, found that GDP causes FDI in Chile and not vice
versa while in the case of both Malaysia and Thailand, there is strong
evidence of a bi-directional causality between GDP and FDI. Nnadozie and
Osili (2004) also found evidence on the role of GDP growth having a
significant impact on FDI.
In addition to GDP,taxes are another variable that influences investment. A
corporate tax is a tax that must be paid by a corporation based on the
amount of profit generated. Most businesses calculate their profit taking
into account the depreciation cost of capital goods while on the other hand
when most government calculate a corporations profit they do not take into

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account depreciation cost thereby overestimating profit. This definition of

profit influences investment decision since when a corporation may
calculate that they are making zero economic profit the government may
see the businesss profit as being more and may levy a tax on profit when in
actuality there is none. This means that the level of investment and
corporate tax have an inverse relationship since if corporate taxes were to
increase potential investor may have a disincentive to invest since expected
net profits will decrease as the corporate tax increases. (Mankiw, 2009)
Tax policies also have an effect on FDI as evidenced by a Shang-Jin Weis
study (2000) which determined that an increase in the tax rate on MNEs
reduces the level of inward FDI. U.S. MNEs generally avoid countries with
higher income taxes on U.S. affiliates (Cooke, 1997). Another study by Batra
and Ramachandran (1980) found that an income tax on MNEs by any
country drives their capital out and lowers their rate of return on capital
stock and possibly on their specific factors, such as technology, managerial
know-how, marketing techniques, etc.
Whether a country is a member of international trade agreements may
also influence the flow of Foreign Direct investment into a country. Buthe
and Milner (2008) pointed out that:
The flow of foreign direct investment into developing countries varies
greatly across countries and over time. The political factors that affect these
flows are not well understood. Focusing on the relationship between trade
and investment, we argue that international trade agreement-GATT/WTO
and preferential trade agreements (PTAs)-provide mechanisms for making
commitments to foreign investors about the treatment of their assets, thus
reassuring investors and increasing investment. These international
commitments are more credible than domestic policy choices, because
reneging on them is more costly. Statistical analyses for 122 developing
countries from 1970 to 2000 support this argument. Developing countries
that belong to the WTO and participate in more PTAs experience greater
FDI inflows than otherwise, controlling for many factors including domestic

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policy preferences and taking into account possible endogeneity. Joining

international trade agreements allows developing countries to attract more
FDI and thus increase economic growth.

Economic stability exerts a strong influence over the flows of foreign

direct investment into Guyana. Most investors that are interested in
investing into a foreign country are looking for an environment that has low
risk. A study done by Nnadozie and Osili (2004) concluded that economic
instability is negatively related to Foreign Direct Investment. Buckley et al,
2007) also saw economic instability as having a negative impact on FDIs
and used the inflation rate to measure this macroeconomic variable.
Finally foreign investors make their investment decisions based on the rate
of return which evaluates the efficiency of an investment or compares the
efficiency of a number of different investments. Foreign investors will
naturally seek out different countries to invest in but will choose the
country that is most likely to have a high rate of return or high expected
profit ceteris paribus since all investors are interested in maximizing their
profits whenever possible (Investopedia, 2012).

However, to simplify this model, the above function is now confined to:
FDI= f (INF EXC TO , GDPGR ,TE , Ypc )
The level of GDP growth rate , the openness of the economy, income per
capita, Human resource, Inflation rate and exchange rate will be used in
the econometric model since it is expected that in the context of Guyana
they will have the most significant impact on investment. In addition to this,
information for these variables is more readily available and accurate than
the other variables that were discarded.

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The variables that were excluded will present a challenge in finding

accurate information or ways of measuring the variable. For example
information on the rate of return on foreign direct investment is not readily
available along with the variable economic policy since much research was
not done in Guyana on how to measure the variable. The presence of rival
firms was also discarded since the researchers felt that in the context of
Guyana the only industry that may have this variable as a determinant of
whether multinational enterprises will enter the country or not is the fast
food industry which only accounts for a small portion of the economy.

Using a single equation the econometric specification of the model is:

Let the dependent variable be FDI (Foreign Direct Investment), independent
variables, Inflation rate be INF, exchange rate be EXC, Trade openness be TO,
GDP growth rate be GDPGR, Tertiary Enrollment be TE, and Income per capita
be Ypc.

FDI= C+ INF+ EXC+ TO + GDPGR +TE +Ypc +U

On a priori grounds for the expectation of the signs of the models

parameters above:

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Paramet Signs Reasons

ers
B0 + or This sign can be positive when an economys level of
(Constan foreign outflows is less than its inflows and negative when
t) the foreign inflows are greater than its outflows.

B1 (INF) _ The inflation rate is expected to have a negative

relationship with foreign direct investment since it is a
proxy for economic instability. The more unstable an
economy the less likely investors will investment since
there is a high risk on their return.
B2 (EXC) _ An overvalued exchange rate or highly distorted foreign ex
change rate will discourage exports and negatively aect fo
reign direct investment.
B3 (TO) + In this study trade openness is computed as export plus
import divided by GDP. The sign of the coefficient is
expected to be positive. The more open an economy is, it
allows foreign firms to invest the country thus improving
FDI.
B4 + B5has a positive relationship with Y since an increase in the
(GDPGR) level of GDP and therefore the productivity capacity of an
economy would have improved and as result persons would
have an incentive to invest.
B5 (TE) + Human resources in a country is expected to have a
positive eect on the FDI because if there is a large
available labor force firms will acquire cheap labor easily.

B6 (YPC) + Income per capita is expected to have a positive sign, since

the more per capita income is in an economy, the
purchasing power of the citizen increases, so investing in
Guyana will be profitable for firms.

Specified econometric model:

FDI= C- INF- EXC+ TO + GDPGR +TE +Ypc +U

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Finding

FDI = -145766129.556 - 23299.8648086*INF - 144845.547158*EXC +

70834338.4553*TO + 361323.111774*GDPGR - 2514181.92482*TE +
116393.020944*YPC

Interpreting the bs of the equation above , the B0 value practically says, by

holding all the other variables constant, the level of foreign direct
investment or net inflows into Guyana (Y) is likely to be at a level of
-145766129.6.In other words this means that without the influence of the
inflation rate, exchange rate, Trade openness, GDP growth rate, total
tertiary enrollment and the economys income per capita, there is likely to
be more outflows than inflows into Guyana resulting in such a large
negative net inflows.

B1; the slope of the inflation rate variable( X1) says, with every one unit
increase in the inflation rate, foreign direct investment is likely to decrease
by an amount of 23299.86,ceteris paribus.

The slope of the exchange rate, B2, ceteris paribus, indicates that with every
one unit increase in the exchange rate of Guyana, the level of foreign direct
investment inflows is likely to decrease by 144845.5.

The positive slope of the trade openness variable (X3), can be interpreted as
by holding all other variables constant, with every one unit increase in the
trade openness , foreign direct investment inflows would increase by
70834338.

B4; the slope of the GDP growth rate variable (X4) says, ceteris paribus, with
every one unit increase in Guyanas GDP growth rate, foreign direct
investment inflows is likely to increase by an amount of 361323.1.

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B5; the slope of tertiary enrollment, variable x5, says that by holding all
other possible variables constant, every one percent increase in Guyanas
tertiary enrollment, its foreign direct investment is likely to decrease as a
result by an amount of 2514182.

B6 ; the slope of the Income per capita, variable X6 , says that with every
one unit increase in the Income per Capita FDI inflows increases by
116393 ceteris paribus.

Statistical Significance of variables

T-Test

H0: Bs=0

H1: Bs0

Level of significance:5%

Test statistic t ratio (t-statistic values)

Decision Rule: Reject H0 if and only if computed t statistic is less than t

critical -2.069 or more than t critical 2.069 otherwise accept H0.

Computation of T statistic: B1 = -0.172535, B2 = -0.689540, B3 = 3.144921,

B4 = 0.266199, B5 = -0.665477, B6 = 5.748095

Conclusion:

B1: Accept H0, the variable is statistically insignificant

B2: Accept H0, the variable is statistically insignificant

B3: Reject H0, the variable is statistically significant

B4: Accept H0, the variable is statistically insignificant

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Seon Brathwaite
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B5: Accept H0, the variable is statistically insignificant

B6: Reject H0, the variable is statistically significant

Economic a priori criteria:

With respect to the confirmation of the signs of the estimators to economic

theory, the derived results of this model shows all signs confirming to theory
with the exception B5 in the model that is associated with the explanatory
variable; tertiary enrollment, which revealed a negative sign when expected
to be positive. Perhaps possible misspecification of the model may result in
such happenings. Since that sign differed however, it is considered to be an
unsatisfactory estimate and should be rejected.

Testing the significance of the bs at a 95% confidence level revealed very

unsatisfactory results since all the estimated bs were deemed statistically
insignificant except two; B3 and B6 . It can be concluded that only these two
variables have a significant impact on the dependent variable FDI.

Statistical Criteria; fi rst order tests:

Results showed that the coefficient of determination; R 2 showed on average

0.851323% of the total variations of Foreign direct investment in Guyana
being explained by the previously outlined independent variables of the
model. It can be concluded that the explanatory power of the model is on
average or more or less acceptable as its greater than 50%. The adjusted
R2, which took into account the degrees of freedom, was approximately
0.812538%.

Addressing the standard deviation of the dependent variable, we see that it

is very large at 59756481 and also the standard error of the regression
examined as a measure of dispersion of the estimates around the true
parameters proved to be extremely large also at 25872676. These large

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dispersions can be the contributing factor to the number of resulting

statistically insignificant estimates mentioned previously.

Finally the FDI model also indicated that it had a correct functional form
with the Akaike Information Criterion (AIC) and the Schwarz Bayesian
Information Criterion (BIC) being relatively low with a value of 37.17624
and 37.50318 respectively.

Overall fit of the model

F test

5% level of significance

Ho: B1 =B2. Bk = 0

H1: B1 B2 Bk 0

Test Statistic: F Statistic

Decision rule:

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If F statistic is greater than the F critical 2.527, reject Ho and conclude at

the variables are not equal to each other or to 0 and the model therefore is
significant overall. If F Statistic is less than the F Critical 2.5277, accept
Ho.

Computation: F Statistic = 21.94970

Conclusion: Reject Ho, the model is statistically significant overall

The F-statistic derived to test the significance of the entire equation is

21.94970. Testing this value at a 5% level, not surprisingly concluded that
the overall equation is however statistically significant though most of the
individual bs arent and the breech of assumptions associated with the
residual and explanatory variables. This is one of the features of the
presence of significant Multicollinearity especially.

Economic Criteria: Second order tests:

Considering the major assumptions tests to ensure that the assumptions of

the OLS method hold, included the test for linearity and the Jaque Bera test
of Normality to test whether the series of residuals were normally
distributed. The test statistic measures the difference of the skewness and
kurtosis of the series with those from the normal distribution. A small
probability value leads to the rejection of the null hypothesis of a normal
distribution of the residuals. Therefore the reasonably high probability
value of 0.169681 resulting, would lead to a conclusion that the residuals of

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this model are normally distributed. Having a small and finite data set,
normally distributed residuals not only helps us to derive the exact
probability distributions of OLS estimators but also enables us to use the t,
F, and 2 statistical tests for regression models.

There was also the correlation matrix which revealed some degree of
Multicollinearity between some of the variables some serious and others not
so serious.

The correlation matrix below highlights the threatening or serious levels of

Multicollinearity which we see exists between the explanatory variables;
income(X6) and the exchange rate (X2), with a high level of positive
correlation at a of degree 0.64 approximately. An even higher more degree
of correlation exists between the variables exchange rate (X 2) and the
tertiary enrollment of the economy (X5) exhibiting a 0.93 percent of
correlation. To a little lesser degree, positive correlation exits between the
variables Income per capita(X6) and tertiary enrollment(X5), at a level a
little above 0.6 percent. Even though there was extremely high correlation
among the explanatory variables, the existence of multicollienarity in the
model was not treated as a problem by the researcher as this is common in
economic studies.

The variance inflation factor test was also conducted on the model, it was
seen that only two variables; inflation rate and GDP growth rate had no
multicollinearity present. Total Enrollment, Income per capita and Trade
openness all had multicollinearity present however these were bad since the
VIF was below 10. The exchange rate had a VIF of approximately 12.7
which was extremely high however this variable was not dropped because
the variable that it was high correlated with; tertiary enrollment, in reality
had no real connection with the exchange rate.

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Durbin- Watson test for Autocorrelation

Ho: p=0 the us are not auto-correlated with a first order scheme

(No autocorrelation)

H1: p 0 the us are auto-correlated with a first order scheme was not

(Autocorrelation, two-sided)

Durbin-Watson statistic = 1.836389

Degrees of freedom= 7 (including intercept)

dl 0.926 du 2.034

Decision rule:

A value of dw close to 2 indicates that the first order autocorrelation

coefficient is close to zero (no autocorrelation)

If dw is much smaller than 2, this is an indication of positive

autocorrelation ( > 0); if dw is much larger than 2 then < 0 negative
autocorrelation

Positive autocorrelation

If d* < dl reject Ho and accept that positive autocorrelation exists

If d* > du do not reject Ho and conclude that no positive autocorrelation

exists.

If dl < d* < du test is inconclusive

Decision

Accept Ho there is no autocorrelation, positive autocorrelation test

inconclusive.

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The Durban Watson statistic was 1.836389. Testing at a 5% level of

significance, k being 7, it was proven that The Durbin-Watson statistic was
relatively close to 2 (1.836389) with indicates that the first order
autocorrelation coefficient is close to zero. This test for positive
autocorrelation was then conducted which gave an inconclusive results

Heteroskedasticity Test

White Test

5% level of significance

Degrees of freedom = K, minus intercept

Ho: no heteroskedasticity

Hi: Heteroskedasticity

Decision rule:

If Chi-Square critical value > chi- square statistic (Obs*R-squared) 12.592

accept Ho and conclude that there is no heteroskedasticity

If If Chi-Square critical value < chi- square statistic (Obs*R-squared)

12.592reject Ho and conclude that there is heteroskedasticity

Computation: Chi Square Critical = 12.16963

Conclusion: Reject Ho because Chi critical is less than Chi stat, there is
heteroskedasticity in the model.

According to the Whites test for heteroscedascticity, if the probability

value is 5% or more then it can be concluded that the residual terms are
heteroscedastic. The results for our model is just a little over 5% hence it is

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concluded that the variance of the us are not constant throughout the
observations.

Correct specification and functional form

Ramsey RESET Test

5% level of significance

Ho: No Specification error

H: Specification error

Test Statistic: F Statistic

Decision rules:
If F Stat greater than the F Critical 3.4668 we reject Ho and conclude that
added terms are not all equal to zero which means that there is
specification error. If F Stat less than the F Critical 3.4668 we accept Ho
and conclude that there is no specification error in the model.

Computation: F Statistic = 4.978153

Conclusion: Reject Ho, there is specification error in the model.

When tested at the 5% level of significance it was concluded that the model
was miss specified, this was cause by including variable that had little or no
effect on the dependent variable. This was also may be caused by the
omission of an important variable. This was also responsible for the low T
scores.

The model was used to forecast FDI inflow in Guyana from 2011 to 2013,
and compared with the actual FDI inflow for that period. This forecast gave

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us a mean absolute error of 36133220 which was very large and indicated
that the error term would be large due to a lot of unexplained data/

Conclusion

The researcher did extensive research to come up with a list of variables

that had an impact on the Foreign Direct Investment inflows. From the list
six were chosen based on the availability of data. Guyana does not have
much information available for the research, so the researcher had to settle
for secondary data from foreign websites to conduct the study.

A T- test was conducted on each of the chosen variables and the results
showed that four of the variable namely; the interest rate, exchange rate,
GDP growth rate and tertiary enrollment, had an insignificant impact on the
dependent variable Foreign Direct Investment. The remaining two
variables; Trade openness and income per capita, had significant impact on
the dependent variable. When it came to the variables confirming to
economic theory and having their expected signs, all the variables did so
with the exception of tertiary enrollment.

The Durbin Watson test statistic was close to 2 (1.836389) this means that
the model has no auto correlation, however a test was done for positive auto
correlation and the result was inconclusive. So it was accepted that
observations of the error term are uncorrelated with each other.

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The existence of these significance of degrees of Multicollinearity among

explanatory variables is very likely to be contributing factors to the large
standard deviation of the dependent variable and large standard error of
the regression which in turn contributes the number of insignificant
estimators; the estimated bs. Multicollinearity exists perhaps because of
the usual trend factors connected to time series data as was used in this
study. However, this situation can be remedied by acquiring more priori
information before piecing together the model, maybe the variables chosen
just dont work well together or we needed a wider data range so variations
in the variable smooths out.

The model showed that specification error was present, but the research
could not correct this by using natural log since the variables included
negative numbers, and negative numbers cannot be naturally logged.

With respect to the forecasting ability of the model, we can logically

conclude that this model cannot be uses as is for any further forecasting or
analysis since most the bs are statistically insignificant, one of the signs
does not confirm to economic theory, some major assumptions associated
with the OLS method used did not hold, hence producing very high stand
errors and inefficient estimators; the properties of a good estimator
generally doesnt hold. The researcher went ahead and did a forecast for
FDI inflows from 2011 to 2013, the result showed a mean absolute error of
36133220 and a mean absolute error percentage of 17.94 which is very
large, this indicates that the model is not good enough for forecasting since
these numbers are very high

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Limitations

First of all, the researcher was not able to make totally accurate and
unbiased evaluations on the impact of the exchange rate, inflation rate, GDP
growth rate, trade openness, tertiary enrollment and income per capita on
the level of Foreign Direct Investment inflows into Guyana since there was
no access to primary. The resources necessary to obtain first-hand
information was impossible to acquire therefore, the researchers were
confined to secondarily sourced data from the internet.

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In terms of the empirical results obtained which were mostly statistically

insignificant the researcher wanted to pick explanatory variables which
related specifically to the Guyanese economy, as was done in the case
studies mentioned in the literature review instead of using generalized
variables that influenced FDI inflows, but with the lack of availability of data
this was not possible. In addition to this a larger sample size should have
been used along with some lagged explanatory variables since this proved
to produce statistically significant results in both cases studies. Moreover
different forms for estimation of the regression equation such as those used
in John Anyanwu research could be used if this research should be taken
further to obtain more statistically significant results.

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References

World Bank (2013), World Development Indicators,

International Monetary Fund (2013), Data and Statistics,

Anyanwu, John (2012), Why Does Foreign Direct Investment Go Where It

Goes?: New Evidence

From African Countries, Annals of Economics and Finance 13(2) pp. 425-
462.

National Bureau of Economic Research (2011), Determinants of Foreign

Direct Investment,

Princeton Encyclopedia of the World Economy (2010), Exchange Rates and

Foreign Direct Investment,

Washington University in St. Louis: Center For Research in Economics &

Strategy (2010), Factors Driving US Foreign Direct Investment,

Alan Bevan, and Saul Estrin (2004), The determinants of foreign direct
investment into European transition economies.

Kwaku Tsikata,Yaw Asante and E. M. Gyasi,Determinants of Foreign Direct

Investment in Ghana.

Tesfanesh Zekiwos,Determinants of Foreign Direct Investment Inflows to

Sub-Saharan Africa: a panel data analysis.

Bthe, Tim and Milner, Helen (2008), The Politics of Foreign Direct
Investment into Developing Countries: Increasing FDI through International
Trade Agreements? American Journal of Political Science, 52(4) pp. 741-
762.

42
Seon Brathwaite
10/0833/1672

Bevan, Alan and Estrin, Saul (2004), The determinants of foreign direct
investment into European transition economies, Journal of Comparative
Economics, 32(2004) pp. 775-787.

Quer, Diego and Claver, Enrique (2007), Determinants of Spanish Foreign

Direct Investment in Morocco, Emerging Markets Finance & Trade, 43(2)
pp. 19-32.

Koutsoyiannis, A (1977), Theory of Econometrics: An Introductory

Exposition of Econometric Methods Second Edition, (Barnes and Noble
Books).

Blanchard, Olivier and Amighini, Alessia, et al (2010), Macroeconomics A

European Perspective First Edition, (Pearson Education Limited).

Mankiw, Gregory (2010), Macroeconomics Seventh Edition, (Worth

Publishers).

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Raw Data Used for the study

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OLS regression equation results

Dependent Variable: FDI

Method: Least Squares
Date: 07/27/14 Time: 16:08
Sample: 1981 2010
Included observations: 30

Variable Coefficient Std. Error t-Statistic Prob.

C -1.46E+08 45015564 -3.238127 0.0036

INF -23299.86 135044.3 -0.172535 0.8645
EXC -144845.5 210061.2 -0.689540 0.4974
TO 70834338 22523409 3.144921 0.0045
GDPGR 361323.1 1357341. 0.266199 0.7925
TE -2514182. 3778017. -0.665477 0.5124
YPC 116393.0 20248.97 5.748095 0.0000

R-squared 0.851323 Mean dependent var 57399296

Adjusted R-squared 0.812538 S.D. dependent var 59756481
S.E. of regression 25872676 Akaike info criterion 37.17624
Sum squared resid 1.54E+16 Schwarz criterion 37.50318
Log likelihood -550.6435 Hannan-Quinn criter. 37.28083
F-statistic 21.94970 Durbin-Watson stat 1.836389
Prob(F-statistic) 0.000000

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Correlation Matrix and the Variance Inflation Factor

Inflation Exchang TradeOp GDPgr TertiaryEnroll INCOME

eRate eness ment pc
Inflation 1.000
ExchangeRa -.258 1.000
te
TradeOpene -.058 .308 1.000
ss
GDPgr -.064 .459 .540 1.000
TertiaryEnr -.261 .933 .272 .410 1.000
ollment
INCOMEpc -.219 .640 -.429 .153 .609 1.000

Variance Inflation Factors

Date: 07/31/14 Time: 20:52
Sample: 1981 2010
Included observations: 30

Coefficient Uncentered Centered

Variable Variance VIF VIF

C 2.03E+15 90.81633 NA
INF 1.82E+10 1.560947 1.101305
EXC 4.41E+10 40.04589 12.68179
TO 5.07E+14 70.55705 6.406693
GDPGR 1.84E+12 2.131576 2.040371
TE 1.43E+13 45.64908 7.795381
YPC 4.10E+08 27.77282 8.001250

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Seon Brathwaite
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Line fit plot showing linearity

Inflation Line Fit Plot

500000000
FDI(inflows)
0 Predicted
FDI(inflows)
FDI(inflows)
-500000000

Inflation

ExchangeRate Line Fit Plot

500000000
FDI(inflows)
0 Predicted
FDI(inflows)
200 FDI(inflows)
-500000000
0 400

ExchangeRate

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TradeOpeness Line Fit Plot GDPgr Line Fit Plot

500000000 500000000
FDI(inflows) FDI(inflows)
FDI(inflows) 0 Predicted FDI(inflows) 0 Predicted
024 FDI(inflows) 0 FDI(inflows)
-500000000
-20 20
-500000000
TradeOpeness GDPgr

TertiaryEnrollment Line Fit Plot

400000000
200000000 FDI(inflows)
FDI(inflows) Predicted
0
FDI(inflows)
-200000000 10
0 20

TertiaryEnrollment

INCOMEpc Line Fit Plot

400000000
200000000 FDI(inflows)
FDI(inflows) Predicted
0
FDI(inflows)
-200000000 2000
0 4000

INCOMEpc

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Histogram showing if residuals are normally distributed

8
Series: Residuals
7 Sample 1981 2010
Observations 30
6
Mean -1.84e-08
5 Median 2164794.
Maximum 65311305
4 Minimum -48912871
Std. Dev. 23041262
3 Skewness 0.554364
Kurtosis 4.268408
2
Jarque-Bera 3.547672
1 Probability 0.169681

0
-4.0e+07 -2.0e+07 100.000 2.0e+07 4.0e+07 6.0e+07

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Whites Heteroskedasticity test results

Heteroskedasticity Test: White

F-statistic 2.616338 Prob. F(6,23) 0.0441

Obs*R-squared 12.16963 Prob. Chi-Square(6) 0.0583
Scaled explained SS 11.68953 Prob. Chi-Square(6) 0.0693

Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 07/23/14 Time: 21:42
Sample: 1981 2010
Included observations: 30

Variable Coefficient Std. Error t-Statistic Prob.

C -2.14E+14 4.16E+14 -0.513257 0.6127

TO^2 3.98E+14 1.17E+14 3.408195 0.0024
GDPGR^2 -6.04E+11 4.69E+12 -0.128813 0.8986
YPC^2 1.90E+08 1.27E+08 1.498258 0.1477
INF^2 -2.07E+10 2.85E+10 -0.726639 0.4748
EXC^2 -2.07E+09 2.31E+10 -0.089437 0.9295
TE^2 -9.80E+12 6.39E+12 -1.532284 0.1391

R-squared 0.405654 Mean dependent var 5.13E+14

Adjusted R-squared 0.250608 S.D. dependent var 9.44E+14
S.E. of regression 8.17E+14 Akaike info criterion 71.71194
Sum squared resid 1.53E+31 Schwarz criterion 72.03888
Log likelihood -1068.679 Hannan-Quinn criter. 71.81653
F-statistic 2.616338 Durbin-Watson stat 2.850153
Prob(F-statistic) 0.044086

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Ramsey Reset test Results

Ramsey RESET Test

Equation: UNTITLED
Specification: FDI TO GDPGR YPC INF EXC TE C
Omitted Variables: Powers of fitted values from 2 to 3

Value df Probability
F-statistic 4.978153 (2, 21) 0.0170
Likelihood ratio 11.64163 2 0.0030

F-test summary:
Mean
Sum of Sq. df Squares
Test SSR 4.95E+15 2 2.48E+15
Restricted SSR 1.54E+16 23 6.69E+14
Unrestricted SSR 1.04E+16 21 4.97E+14
Unrestricted SSR 1.04E+16 21 4.97E+14

LR test summary:
Value df
Restricted LogL -550.6435 23
Unrestricted LogL -544.8227 21

Unrestricted Test Equation:

Dependent Variable: FDI
Method: Least Squares
Date: 07/23/14 Time: 21:38
Sample: 1981 2010
Included observations: 30

Variable Coefficient Std. Error t-Statistic Prob.

TO -26434001 37870293 -0.698014 0.4928

GDPGR -1646.368 1178701. -0.001397 0.9989
YPC -90177.90 71952.78 -1.253293 0.2239
INF -26972.85 116658.6 -0.231212 0.8194
EXC 120237.9 214992.9 0.559265 0.5819
TE 3438602. 3800109. 0.904869 0.3758
C 71060279 83081557 0.855307 0.4020
FITTED^2 2.41E-08 7.65E-09 3.145055 0.0049
FITTED^3 -7.80E-17 2.61E-17 -2.989687 0.0070

R-squared 0.899141 Mean dependent var 57399296

Adjusted R-squared 0.860719 S.D. dependent var 59756481
S.E. of regression 22301327 Akaike info criterion 36.92152
Sum squared resid 1.04E+16 Schwarz criterion 37.34187
Log likelihood -544.8227 Hannan-Quinn criter. 37.05599
F-statistic 23.40155 Durbin-Watson stat 2.065652
Prob(F-statistic) 0.000000

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Forecast for 2011 - 2013 Results

400,000,000
Forecast: FDIF
Actual: FDI
360,000,000
Forecast sample: 2011 2013
Included observations: 3
320,000,000 Root Mean Squared Error 61110947
Mean Absolute Error 36133220
280,000,000 Mean Abs. Percent Error 17.93849
Theil Inequality Coefficient 0.117259
240,000,000 Bias Proportion 0.317404
Variance Proportion 0.011012
Covariance Proportion 0.671584
200,000,000

160,000,000
2011 2012 2013

FDIF 2 S.E.

Year Actual FDI Forecast FDI

2011 246800000 244000000
2012 277910000 278000000
2013 200523800 306000000

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Table showing average FDI for founding members of Caricom 2003-

2012

53