government policies, regulation, and market characteristics. First, it is important to note that
both taxes and regulations are particularly important for efficiency-seeking foreign firms
(Kandogan, 2012). To control for government direct incentive policy, I include the measure of
the top marginal corporate tax rates. Since multinational corporations are sensitive to the
existing tax rates, I expect both corporate tax rates and regulation to correlate negatively with
FDI. The national corporate tax rates are from Tax Policy Center. The government regulation
variable is measured as the total pages in the code of federal regulation. The data is obtained
union membership rate. Previous studies suggest that higher unionization rate decreases FDI not
of the production process harder (e.g., Owen, 2013). The union membership rate is measured as
the percentage of wage and salary workers who holds the union membership. The data is from
Economics: The Open-Access, Open-Assessment E-Journal 14 (2020–15)
www.economics-ejournal.org
11
Second, the government expenditure variable is the general government’s final consumption
expenditure, which includes government consumption of goods and services for current use, as
a percentage of GDP.
While most of neoclassical economics and empirical works on economic
growth suggest that government consumption expenditure should have a negative relationship
with growth, more recent works on new growth theory has stressed the potentially positive role
of the government’s consumption on macro-economic performance (Barro, 1990; Lucas, 1990).
According to Keynesian theory, government spending—particularly an increase in budget
deficits—stimulates economic growth by enhancing the purchasing power of individuals. By
contrast, some economists suggest that debt-financed increases lead to higher interest rates,
which dampens potential investment. Despite this range of perspectives on the impact of
government spending, however, there is a growing consensus in empirical studies that
government consumption spending, including both non-market goods and individual social
goods, has little effect on subsequent economic growth (e.g., Barro, 1990; Connolly and Li,
2016; Hansson and Henrekson, 1994). Thus, I expect a negative correlation between gover-
nment expenditures and FDI inflows, following the recent findings on this issue.
In addition, the models control for national economic and market conditions. The economic
growth variable marks the annual percentage of change in GDP at market prices. Economic
growth rates have an effect on domestic markets. Thus, I expect to see a positive impact of
market conditions on FDI inflows. Scholars suggest that investors pay closer attention to larger
and wealthier countries due to the higher expected returns from them. The variable of market
size variable is measured as the log of population, which accounts for market volume and
potential. The models also include real interest rate. This is computed as the difference between
the prime rate, as charged by banks, and the rate of inflation, as measured by growth in the GDP
deflator. Firms are more likely to invest in regions with higher interest rate because they can
expect to earn more benefits. Thus, I expect the real interest rate is positively correlated with
FDI inflows. The variable for inflation variable reflects an annual percentage for change in the
GDP deflator. This is also measured as% change in the price deflator. Ahlquist (2006, p. 692)
argues that “the price deflator measure has marginally better time series coverage and
international investors are arguably interested in overall price stability in the economy, not just
prices for final consumption goods.” Thus, I assume that the inflation variable is negatively
associated with FDI inflows. Last, trade openness is measured as imports and exports of goods
and services, divided by GDP. Trade is the traditional measure used by studies investigating the
effects of economic openness. I expect that trade openness is positively associated with FDI
inflows.
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