A Clear Advantage: The Benefits of Transparency to Foreign Direct InvestmentBy Elaine Shen and Mike Sliwinski

The Story of Vietnam

A Link Between Transparency and FDI Our research question: How does a country’s

transparency influence the amount of FDI a country receives?

Our hypothesis: increased transparency has a positive correlation to FDI

Variables: HRV Index and FDI data

Methodology: STATA regression analysis

Results: confirm our hypothesis

Conclusion: increasing transparency increases FDI

Hypothesis

Research Question: Does a country’s level of transparency affect the amount of FDI it receives?

Yes!

Strong positive relationship

Factors

Independent Variable (x) Transparency

Freedom House/Heritage Foundation, newspaper circulation, fraction of WDI reported

The HRV Index

Dependent Variable (y) Foreign Aid

GDP per capita

Foreign Direct Investment (BOP, constant USD)

Methodology: Regressions Controls

Country fixed effects Inflation (CPI) GDP growth rate (annual % change) Exports (% GDP) Imports (%GDP) Interest rate Exchange rate

Lag Transparency

“Diff and diff” method

Greater transparency leads to greater FDI

Results:

Figure 1: Transparency and FDI (linear best fit)

-200

000

-100

000

01

0000

02

0000

0

-10 -5 0 5 10transparencyindex

Foreign direct investment, net (BoP, Millions of CONSTANT US$) Fitted values

Transparency and FDI

Figure 2: Transparency and FDI (linear prediction with error bars)

-500

00

500

01

0000

-10 -5 0 5 10transparencyindex

95% CI predicted foreigndirectinvestmentnetb

Figure 2: Transparency and FDI with 95% confidence intervals

Table 1: ResultsTable 1

The Effect of Transparency on Foreign Direct Investment (BOP, millions of constant USD)

Variable (1) (2) (3) (4) (5)

Transparency (HRV Index) 1790.500*** 1693.116*** 1227.327*** 1262.701*** 1263.859***

(437.250) (461.568) (466.394) (483.144) (483.666)

Inflation (CPI) -147.566 -57.729 -73.528 -74.169

(146.894) (146.432) (164.924) (165.182)

GDP growth (annual %) -1041.357*** -1050.706*** -1052.716***

(216.320) (223.164) (224.273)

Exports (%GDP) -30.741 -32.777

(25.907) (33.177)

Imports (%GDP) 4.361

(44.338)

Constant -2332.838** -1206.874 3286.166* 4573.874** 4475.417*

(958.456) (1446.541) (1709.490) (2118.250) (2344.338)

Number of observations 680 662 658 638 638

Adj. R-squared 0.02 0.02 0.06 0.06 0.05

Notes: Standard errors in parentheses.  

*** indicates significance at the one percent level, ** at the five percent level, and * at the ten percent level.

Conclusion Increased transparency is positively

correlated to increased FDI

Causal Logic: the benefits of increased information

Further researchGDP per capitaForeign aidInstrumental variables

Significance: policy suggestions