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date: 16 August 2017

Determinants of Foreign Direct Investment (FDI)

Summary and Keywords

Foreign direct investment (FDI) is a major component of globalization. Because of the important role it plays in economic growth and development, many scholars have directed their interest and knowledge to theoretical and/or empirical studies of the causes of FDI. There has been a rapidly growing body of literature that theorizes, hypothesizes, and empirically tests the determinants of FDI. There is no single theory of FDI; rather, various theories look at FDI from different angles and complement each other. Likewise, the empirical studies of FDI are incremental and experimental. The main theoretical approaches to FDI are presented, the empirical evidence gathered in the literature is introduced, and future research is discussed.

Keywords: foreign direct investment (FDI), theories, evidence, empirical international relations theory, International Monetary Fund (IMF)


Foreign direct investment (FDI) is a major component of globalization, together with international trade. Its operation is made possible by movements of factors across countries, in particular, capital. By definition, FDI involves long-term cross-country commitments. According to International Monetary Fund (IMF), FDI entails the establishment of a “lasting interest” by a resident entity of one economy in an enterprise located in another economy (International Monetary Fund, 1993). Lasting interest implies a long-term relationship between the foreign investor and the overseas enterprise where the said investor holds significant influence over management. The IMF defines a direct investment enterprise as one in which a foreign investor holds at least 10% of the ordinary shares or voting power (International Monetary Fund, 1993). The Organization for Economic Cooperation and Development (OECD, 1996, p. 10) classifies enterprises of direct foreign investors into three groups: subsidiaries, in which a nonresident investor holds more than 50% of the ownership; associates, in which a nonresident investor’s shares range between 10 and 50%; and branches, which are unincorporated enterprises owned by a nonresident investor, wholly or jointly. Obviously, such definitions and the resultant measurements leave ambiguities and imprecisions. However, they do help maintain relative consistency in cross-country comparisons.

From 1995 to 2015, the world saw a dramatic increase in FDI. The FDI inflows in 2015 were 8.6 times those in 1995, an increase from about 0.2 trillion USD in 1995 to about 1.8 trillion USD in 2015. While FDI inflows to developed countries increased 8.6-fold, those to developing countries and transitional economies increased 23 times. In 1995, FDI inflows to developing and transitional economies were 17% of the world total, and in 2015 they accounted for 45%. FDI flows to OECD countries peaked in 2007, at about 1.3 trillion USD. Between 2013 and 2014, for the first time, developing countries received more FDI than developed countries (UNCTAD, 2016), though the developed world recaptured the position as the largest FDI recipient in 2015 (see Figure 1).

Determinants of Foreign Direct Investment (FDI)Click to view larger

Figure 1. FDI Inflows by Three Groups, 1990–2015.

Source of original data: UNCTAD (2016).

There is an ever-growing body of literature on FDI. As Markusen (2008) demonstrated, three strands of relevant literature exist: the international business approach that is oriented toward the rationale of individual firms, the macroeconomic approach that focuses on aggregate flows of FDI without making a distinction between direct and portfolio investments, and the international trade theory approach, which increasingly moves closer to the international business approach, combining firm-level FDI analysis with aggregate analysis of capital flows. The focus in this article is on the international business approach and, to some degree, on the international trade theory approach.


Almost from the beginning, the burgeoning theories of FDI based FDI on imperfect market conditions or market failures, such as monopoly and exclusive technological know-how of firms (Hymer, 1976; Kindleberger, 1969). Other forms of market failures, including information asymmetry, uncertainties, and externalities, may also provide a rationale for FDI. Monopoly has unique power in penetrating overseas markets with firm-specific advantages required to overcome adverse conditions facing the outsider in the host economy, such as challenges associated with culture and language, as well as political systems in the host country. Similarly, it has been also argued that FDI results from an oligopolistic producer’s moving into a foreign economy to compete against its overseas counterparts (Knickerbocker, 1973). Such large companies have both the interest in and capacity for operating in foreign lands, to strengthen or consolidate their market positions internationally.

Other theorists focus on the stages of production as explanations of FDI. Product-cycle theory (Vernon, 1966) treats a product as an organic entity through different stages of life, from infancy (new product), to adulthood (mature product), to dotage (standardized product), corresponding to the four stages of production: initiation, growth, maturity, and decline. While typically the initiation and growth of a product occur in the home country, its production moves from the home economy to a foreign location during the periods of maturity and decline. In the latter stage, production has been standardized and manufacturing overseas minimizes the costs of production and makes it effective to occupy international markets by directly producing and selling there.

The internalization theory of FDI (Buckley & Casson, 1976) integrates Coase’s (1937) theory of the firm with models of international trade and economic geography (Ohlin, 1933; Weber, 1929) to formulate a theory of multinational corporations (MNCs). The theory treats worldwide production units as interrelated clusters connected by intermediate products. A central location creates technology, which is shared throughout the entire process of production around the world. Internalization is premised on market inefficiencies, such as lapse of time in the coordination of resources, differentiated pricing related to market power, unstable bilateral monopolistic bargaining, buyers’ difficulty in estimating the price, and government intervention in the international economy policy arena (Buckley & Casson, 1976; Nayak & Choudhury, 2014), all of which provide a rationale for MNCs and FDI.

Internalization theory is an important component of FDI theories. Internalization results from market imperfections. For example, monopolistic power makes it possible to internalize the production process for the purposes of enlarging markets, obtaining raw materials and other resources, and improving the efficiency of the entire range of productive activities, including research and development, production, marketing, and sales across the home and overseas locations.

Related to internalization are horizontal integration and vertical integration. While the former represents the scenario in which many firms participate in part of the production process in the supply chain, the latter involves one firm’s participating in different parts of production. Obviously, at the international level, horizontal integration and vertical integration are consistent with internalization of MNCs. International vertical integration may entail research and development, raw materials, production of various intermediate goods, assembly of the final products, marketing, transportation, and retail.

The whole process may be driven by the need to increase the base of consumers or to improve the efficiency of production. In order to achieve expansion of the market or to make use of local factors, the MNC may choose to produce the same part of the product in the supply chain in foreign countries simultaneously with domestic production. However, alternatives to internalization achieve the same objectives. Licensing or outsourcing may involve the production of different parts or the same parts in the supply chain overseas. Such alternatives may lack control, compared to subsidiaries, but may offer better efficiency and may be cost-effective. The theoretical and empirical questions are when and where a company will choose to internalize through subsidiaries, associates, or branches instead of licensing and outsourcing.

Product-cycle theory, internalization theory, and horizontal and vertical integration are interrelated, depending on the product and the firm. In product-cycle theory, a product starts with research and development and initial production in the home economy, followed by standardization and mass production, which may involve obtaining raw materials from other countries through acquiring assets overseas (vertical internalization), and, eventually, the product is produced both at home and in subsidiaries, associates, or branches in other countries (horizontal internalization) or is produced through vertical internalization, with different parts manufactured in various sites in the world, with assembly eventually at some location(s).

The eclectic theory of FDI (Dunning, 1977, 1979) is a major milestone in the theories of FDI, with a new emphasis on locations, while incorporating arguments on both firm-specific advantages and internalization. In the eclectic theory of FDI, three conditions are propitious for FDI: The ownership advantage (monopoly, technology, and economies of scale); location advantage, which has implications for all those relevant factors in the host country related to production, including cultural, economic, social, and political dimensions; and finally, the internalization advantage, which entails the production and integration of various intermediate products.

As its name suggests, the theory aims at being comprehensive, empirical, and open-ended. It not only comprises the theoretical arguments about the firm-specific advantages like technology and economies of scale and the needs to improve efficiency through internalization, but also links the earlier theories to the domestic conditions of various host markets. As the latter have large variances, ranging from economic to political conditions, from cultural to sociological characteristics, the eclectic theory of FDI not only offers an immense context for empirical research, but also presents a platform for continued theoretical explorations.

The triad of the eclectic theory—ownership, location, and internalization—provides a set of theoretical determinants for FDI. The approach derived from such a theory is conveniently named the OLI (an acronym for ownership, location, and internalization) paradigm. While the ownership advantage involves technological strengths, economies of scale, and monopolistic power and the internalization advantage organizes productive activities internally to a firm across national boundaries, the location advantage is an area where determinants of FDI are abundant. The list of attractions for FDI is long and may include: market size, population, economic growth, labor cost, human capital, infrastructure, natural resources, degree of existence of property rights, fiscal policies (such as taxation, monetary policies, and price stability), economic openness, trade with other countries, business environment, rules and regulations, corruption, cultural affinity, language, distance and transportation costs, diplomatic and security relations, internal conflict (such as civil wars and revolutions), policy convergence or divergence between the incumbent government and its opposition, the frequency and likelihood of government change, or transition of the political system.

Another milestone work is the classification of FDI on the basis of the objectives of the investors: resource seeking, market seeking, efficiency seeking, and strategic asset seeking (Dunning, 1993). The objective of resource-seeking FDI is to establish an ownership presence abroad to obtain resources not available in the home economy. Resources may include natural resources (e.g., petroleum, natural gas, minerals, etc.), low-cost labor, and technologic and management capacity. This kind of FDI is consistent with vertical integration. The aim of market-seeking FDI is to benefit from an expanded base of consumers through the production and sales of an existing product overseas, which may result in altering the product to conform to the tastes of the local customers. Market-seeking FDI can be obtained through horizontal integration. Efficiency-seeking FDI benefits from the efficient use of certain factors in a foreign economy and results from the “economies of scales and difference in consumer tastes and supply capabilities” (Dunning, 1993, p. 60). Finally, the aim of strategic-asset-seeking FDI is to acquire technology for strategic purposes in other economies.

There may be some overlap in the purposes of the kinds of FDI defined by Dunning (1993). For example, resource-seeking FDI and efficiency-seeking FDI may obtain their objectives through using low-cost labor; and resource-seeking FDI and strategic-asset-seeking FDI may overlap where the acquisition of strategic resources leads to the same outcome. Despite these nuances, the refined classification of FDI by Dunning (1993) offers a new approach to understanding determinants of FDI.

The development theory of FDI links inward FDI and outward FDI with stages of economic development in a country: Initially, labor-intensive sectors attract inward FDI; then, as the economy develops, outward FDI increases to seek overseas markets, resources, and productive efficiency, powered by demands for inputs in domestic production and by technology and skills acquired in the developmental process (Ozawa, 1992). This approach provides a dynamic perspective on the developmental trajectory of an emerging market. It has received empirical support from the Japanese experience and recently from China, which had been the largest FDI recipient for a number of years, and which has lately moved to the top of the list of countries that send FDI to other economies.

Some scholars also link comparative advantage and endowments with trade and FDI, arguing that where comparative advantages dominate, a country will promote trade, and where comparative disadvantages coexist with entrepreneurial endowment, a country will promote outgoing FDI (Kojima & Ozawa, 1984). Another theoretical determinant that links FDI with trade is the so-called tariff-jumping hypothesis. Intuitively, FDI can circumvent the protection of a foreign country by directly producing the good and selling it in the host country. Therefore, theoretically, it can be argued that where trade protection is high, inflow FDI tends to follow, keeping other factors constant. Foreign protectionism as a driver for FDI has received some empirical support, although this option seems to reside with developed countries (Blonigen, 2002). An open economy has also been found to promote FDI (Rachdi et al., 2016). Jun and Singh (1996) found that both protection by tariffs and an open economy may encourage FDI. The empirical evidence on the linkage between protectionism and inward FDI has not been uniform.

Finally, the exchange-rate theory of FDI postulates that relatively weak currency attracts FDI, as opposed to strong currency (Aliber, 1970; Caves, 1989). This theory generally assumes that relatively weak currency in the host country is associated with a decrease in the cost of production relative to the home economy, thus encouraging the inflow of foreign capital from the perspective of efficiency-seeking or resource-seeking FDI. In addition, the price of assets, including transferrable assets, such as technology and management skills (Blonigen, 1997), in the host economy also declines relative to the home economy, resulting in a tendency for acquisitions of foreign assets (Goldberg, 2008), which is consistent with the perspective of strategic-asset-seeking FDI. (For empirical work, see Froot & Stein, 1991; Klein & Rosengren, 1994; Blonigen, 1997; Rachdi et al., 2016.)

Some other works probe into the effects of exchange-rate volatility on FDI. Goldberg (2008) presented two views of the effects: while the “production flexibility argument” postulates a positive effect of exchange-rate volatility on FDI, the “risk aversion argument” indicates a negative effect of exchange-rate volatility. In the former scenario, an investor diversifies his or her international portfolio in expectation of ex post production flexibility and higher returns in response to exchange-rate shocks (Aizenman, 1992; Goldberg & Kolstad, 1995), and in the latter, the investor reduces investment because of financial uncertainty caused by exchange-rate volatility (Cushman, 1985; Itagaki, 1981).

Empirical Evidence

The theoretical works on FDI and, in particular, the eclectic paradigm of FDI provide theoretical foundations for empirical analysis of determinants of FDI. The theories of FDI generate a wealth of variables as potential candidates for statistical evaluation of what causes FDI flows worldwide, which may render the results from empirical and statistical analysis intractable. Most empirical works, however, are dedicated to two sets of variables, with one focusing on the economic dimension and the other on the non-economic dimensions (e.g., politics). From the former, a few empirical works find strong support for market-seeking FDI under the eclectic theory of FDI, identifying positive effects on inward FDI of the size of population, size of economy, level of development, or rate of growth (Altomonte, 2000; Barrell & Pain, 1996; Buckley et al., 2007; Eaton & Tamura, 1994; Kobrin, 1976; Love & Lage-Hidalgo, 2000; Schneider & Frey, 1985; Tuman & Emmert, 1999; Wheeler & Mody, 1992).

Consistently, some empirical works find that governance, fiscal policy, institutional compatibility, or investment infrastructure affects inward FDI (Altomonte, 2000; Cheung et al., 2012; Eaton & Tamura, 1994; Globerman & Shapiro, 2002; Grubert & Mutti, 1991; Habib & Zurawicki, 2002; Levis, 1979; Loree & Guisinger, 1995; Markusen, 1997; Rolfe et al., 1993; Root & Ahmed, 1978; Wheeler & Mody, 1992). Several works that focus on FDI and economic reforms also identify positive evidence (Campos & Kinoshita, 2008; Gastanaga et al., 1998). By contrast, taxes and corruption both reduce inflow of FDI (Wei, 2000).

Furthermore, the positive effect of resource endowments on inward FDI, consistent with the eclectic theory of FDI, receives empirical support (Buckley et al., 2007; Cheung et al., 2012; Kolstad & Wiig, 2012). Some studies find support for both efficiency-seeking and resource-seeking FDI, identifying positive impact on FDI of low-cost labor, infrastructure, and natural resources (Buckley et al., 2007; Urata & Kawai, 2000). Jones and Temouri (2016) found that technologically intensive firms with intangible assets are likely to seek tax-haven strategies overseas by setting up offshore FDI, suggesting a combination of both ownership advantage and location advantage. By comparison, Antrás et al. (2009) focused on the protection of intellectual property in the host country as a determinant of the use of FDI or licensing to a local partner. Weak protection of intellectual property rights by the host country, combined with its shallow capital markets, leads to the international investor’s use of FDI, instead of outsourcing or licensing.

A growing number of studies on FDI examine the relationship between greenfield FDI and M&A (mergers and acquisitions), with the former being investment in new plants and the latter being investment in existing plants. This branch of studies of determinants of FDI typically differentiates developed countries and developing countries as recipient countries for a particular type of investment. For example, Calderon et al. (2002) found that, in developed countries, greenfield FDI and M&A tend to reinforce each other, while in developing countries, although M&A contributes to greenfield FDI, greenfield FDI does not lead to M&A. In addition, domestic investment in developing countries leads to both greenfield FDI and M&A, while domestic investment leads to only M&A in developed countries.

Nunnenkamp (2002) examined the determinants of FDI inflows in developing countries. He characterized the determinants of FDI into two categories: traditional determinants and nontraditional determinants. Traditional determinants can be related to market-seeking FDI; they include population, GDP per capita, and GDP growth rates. Nontraditional determinants include qualitative and institutional indices, such as administrative bottlenecks, entry restrictions, risk factors, complementary factors of production, education, cost factors, restriction on foreign trade, changes in trade share, post-entry restriction, and regulations on technology. The findings indicated that traditional determinants are still the dominant factors in FDI, although some of the nontraditional factors appear relevant, too. For instance, administrative restrictions, risk factors, cost factors, and trade restrictions are all negatively correlated with FDI.

Increasingly, scholars focus on the political and institutional environment of the recipient country to find determinants of FDI, largely consistent with the location advantage in the framework of the eclectic theory of FDI. For instance, attention has been given to the study of the effects of democracy on FDI. While some empirical works find mixed or nonlinear effects of democracy on FDI (Asiedu & Lien, 2011; Li & Resnick, 2003), Biswas (2002), Ahlquist (2006), Jensen (2008), and Zheng (2011) identified a positive impact of democracy on FDI. Several works associated certain attributes of political systems with FDI, such as checks and balances, partisan competition, rule of law, and federalism, and were able to discern their positive effects on FDI (Asiedu, 2006; Daude & Stein, 2007; Halvorsen & Jakobsen, 2013; Jadhav, 2012; Jensen & McGillivray, 2005; Vadlamannati, 2012).

Several studies focused on the existence of property rights and human rights in the recipient countries as a determinant of FDI. Ali, Fiess, and MacDonald (2010) found property rights to be a major driver for FDI, particularly in the secondary and tertiary sectors. Pajunen (2008) also found that property-right protection encourages FDI flows to Central and Eastern Europe, Southeast Asia, and South America. There appear to be conflicting findings regarding the effect of human-rights protection on FDI. Blanton and Blanton (2007) discerned a positive effect of human rights on FDI among developing countries from 1980 to 2003. Similarly, Harms and Ursprung (2002) found that individual rights and civil liberties attracted FDI. Contrary to these findings, Tuman and Emmert (2004) identified a positive effect of human rights violations on the flows of FDI from the United States to fifteen Latin American and Caribbean countries from 1979 to 1996.

In general, political instability has a negative effect on inward FDI (Asiedu, 2006; Nigh, 1985; Pajunen, 2008; Schneider & Frey, 1985; Tuman & Emmert, 1999; Wang & Swain, 1995). With regional particularities, Tuman and Emmert (2004) found a positive effect of coups d’état on the United States’ FDI in the Caribbean and Latin American countries. Enders and Sandler (1996) examined the effect of terrorism on FDI in Greece and Spain and found significant negative impact of terrorist attacks in the two countries on inward FDI. Ouyang and Rajan (2017) demonstrated that the frequency and intensity of terrorist attacks have a pronounced negative effect on M&A flows and that good institutions reduce the impact of terrorism in the developing host country.

The findings of the effect of corruption on FDI are mixed. For instance, Javorcik and Wei (2009) identified a negative effect of corruption on FDI using the firm-level data in Eastern Europe and Russia in the 1990s, while Egger and Winner (2005) found a positive relationship between corruption and FDI among 73 developed and less developed countries from 1995 to 1999. Bénassy-Quéré et al. (2007) found that a wide range of institutional variables, including bureaucracy, legal systems, and corruption, affect inward FDI and that institutional similarity between the home and the host countries also matters. Jensen et al. (2012) produced a dedicated book-length study of the political determinants of FDI. One of their major findings was that in Latin America, leftist governments favor FDI beneficial to labor, and rightist governments favor FDI supported by local capital. However, despite the growing literature and numerous findings on the political determinants of FDI, Arel-Bundock (2016) cautioned in his firm-level analysis that political variables tend not to matter as an influence on FDI.

Some studies unearthed regional or country effects that are unique. For example, Asiedu (2002) shed light on the regional challenges deterring FDI flows to Africa. A few empirical works also yielded counterintuitive results regarding China’s outward FDI, indicating that Chinese investors tend to invest in countries where political risks are high (Buckley et al., 2007; Cheung et al., 2012). Tuman and Emmert (2004) examined U.S. FDI to the Caribbean and Latin America, and Tallman (1988) looked at FDI to the United States from industrialized countries, focusing on the bilateral relationships between them.

Some Areas of Further Research

It should be noted that in almost all studies of determinants of FDI, the dependent variable in the regression analysis tends to be the amount of investment dollars, as defined by IMF. As a result, empirical studies of the determinants of FDI fall short of theoretical studies of FDI, particularly using the OLI paradigm as a starting point. For instance, in the empirical and statistical studies of determinants of FDI, the dependent variable is the aggregate amount of FDI dollar values, instead of FDI disaggregated into the four basic types of allocations: resource seeking, market seeking, efficiency seeking, and strategic asset seeking. By using the amount of FDI at the aggregate level, researchers assume that the determinants of FDI work in the same way and uniformly when applied to the four kinds of FDI separately and individually.

In reality, that assumption may not hold. For example, the determinants for resource-seeking FDI can be very different from the determinants for market-seeking FDI. The former is largely determined by the natural endowment and the location, as well as the political and economic systems of the host country. Traditional market-related factors, such as the size of the economy, size of the population, and growth, may have negligible effects on resource-seeking FDI. Similarly, the rationale for efficiency-seeking FDI and the rationale for strategic-asset-seeking FDI can be vastly different. While the former is typically intended to improve the efficiency of current production, the latter can be driven by a strategic perspective on a new orientation toward a different product. Again, using the same set of independent variables to study their significance on the aggregate level of FDI is misleading. For example, when Chinese investors acquire high-tech proprietary assets in Germany, the purpose is to increase the technological position of the parent company and very often to reorient it for a new direction of its production. It is a strategic investment and may not be directly related to increasing the efficiency of its current production at home or somewhere else. Unless researchers separate different kinds of FDI according to their objectives, using the same set of independent variables on the aggregate dependent variable produces inaccurate estimates of the determinants of FDI and frequently distorts understanding of the true underlying conditions for FDI flows.

Another possible confounding factor is the dynamic effects of globalization and development on the objectives of FDI. For instance, have emerging markets like China and India that are powered by globalization changed the nature of FDI? Have some particular kinds of FDI been used more than others as globalization intensifies or weakens? Do allocations of FDI change by category (e.g., resource seeking, market seeking, efficiency seeking, and strategic asset seeking) in the context of globalization? The dependent variable in this case is the change of FDI type. Again, without the refinement of differentiation and measurement of FDI, it would be impossible to explore the dynamic change and use of FDI. The current empirical research paradigm has not been able to deal with such a research agenda.

In general, candidates for the determinants of FDI can be placed in a two-by-two dimensional framework, with one dimension the economic vs. non-economic, and the other dimension home vs. host. The empirical studies of the determinants of FDI have focused on two out of the four cells in the framework: host country’s economic factors and host country’s non-economic factors, with slight attention given to the home country’s economic and non-economic factors. It cannot be assumed that the latter factors are constant for all countries. The home country’s economic and political orientation also matter for its outward FDI. The 2016 presidential election in the United States, for example, may result in a significant change in its outward FDI, given the reorientation of the country toward reinvestment in the United States and the proposed penalties on outward FDI through border taxes. Such factors in the home economy need be part of the independent variables to study the determinants of FDI, though in one of the few works in this direction, Jones and Temouri (2016) found that corporate tax in the home country is not likely to have a significant impact on the outflow of capital overseas.

A further research platform is the adoption of endogenous policy theory, which postulates that government policy responds to positions taken by constituencies (Baldwin, 1985; Caves, 1976; McKeown, 1989). FDI has been found to produce winners and losers across countries. According to Jaumotte et al. (2013):

In both developed and developing countries, financial globalization—and FDI in particular—are associated with increases in income inequality. In both groups of countries, inward FDI is associated with rising inequality, while in developed countries outward FDI also has an additional negative impact . . . . From the point of view of the host country, FDI tends to take place in higher skill and higher technology sectors. As a result, while FDI increases employment and income, this tends to favor those who already have relatively higher skills and education . . . . Outward FDI in developed economies predictably tends to increase inequality by reducing employment opportunities in relatively lower skill sectors.

(p. 301)

This analysis requires that we pay more attention to the political economic factors that are missing from the empirical studies of determinants for FDI. Political coalitions in the host and home countries, based on economic interests, may result in concrete policies and a general environment that affect FDI. While the winning coalition among migrant farmers, assemblyline workers, relatively highly skilled labor, and the political elite in the emerging market (host economy) may usher in a large influx of foreign capital in developing countries, a winning coalition of manufacturing workers and relatively unskilled labor in developed countries may want to keep capital from leaving the home economy, resulting in a reduction of inward FDI to the emerging markets. It is also possible that an international winning coalition emerges between sectors across countries so that a sector or sectors of the home economy and of the host economy form an alliance across the national border in pushing for or against FDI inflow or outflow.

Conceivably, the decrease in the well-being of those who lose their income or jobs because of outward FDI in developed countries will cause a political demand in the home country to reduce or stop outward FDI. The result of the 2016 U.S. presidential election reflects such political demand for economic change. A comprehensive study of the determinants of FDI needs to be based on both political and economic factors of both the host and home countries. Exclusive use of the economic variables of the host country will produce biased estimates.


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