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The Location of Foreign Direct Investment in the Central and Eastern European Countries: A Nested Logit and Multilevel Data Approach

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Author Info
Simona Rasciute () (Dept of Economics, Loughborough University)
Eric J. Pentecost () (Dept of Economics, Loughborough University)

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Abstract

This paper generalizes the existing empirical literature on the determinants of the location of FDI, using a nested logit (NL) model and a novel three-level dataset to examine the factors explaining 1,108 foreign investment location decisions into 13 Central and Eastern European countries (CEECs) between 1997 and 2007. The NL model relaxes the multinomial logit model assumption of independence of identically distributed error terms and allows for testing if national boundaries affect the investment location choices of MNEs in the CEECs. In contrast to the existing empirical literature on the investment location choices, the Heteroskedastic Extreme Value model is used as a tool to reveal an appropriate nesting structure. The highly significant empirical results, based on a general underlying economic model of imperfect competition, show that the responsiveness of FDI in the CEECs to country-level variables differs both across sectors and across firms of different sizes and profitability. Hence the results of previous studies that used only country-level data or only industry- and firm-level data may be misleading.

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File URL: http://www.lboro.ac.uk/departments/ec/RePEc/lbo/lbowps/Nested_Logit.pdf
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Publisher Info
Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2007_29.

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Date of creation: Dec 2007
Date of revision: Dec 2007
Handle: RePEc:lbo:lbowps:2007_29

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Related research
Keywords: Nested logit model; foreign direct investment; multi-level data; heteroskedastic extreme value model;

Find related papers by JEL classification:
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
P33 - Economic Systems - - Socialist Institutions and Their Transitions - - - International Linkages

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  1. Carstensen, Kai & Toubal, Farid, 2004. "Foreign direct investment in Central and Eastern European countries: a dynamic panel analysis," Journal of Comparative Economics, Elsevier, vol. 32(1), pages 3-22, March. [Downloadable!] (restricted)
    Other versions:
  2. Midelfart-Knarvik, K.H. & Overman, H.G. & Redding, S.J. & Venables, A.J., 2000. "The Location of European Industry," European Economy - Economic Papers 142, Commission of the EC, Directorate-General for Economic and Financial Affairs (DG ECFIN).
  3. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February. [Downloadable!] (restricted)
    Other versions:
  4. Kenneth Train, 2003. "Discrete Choice Methods with Simulation," Online economics textbooks, SUNY-Oswego, Department of Economics, number emetr2, March. [Downloadable!]
  5. Claudia M. Buch & Jörn Kleinert & Alexander Lipponer & Farid Toubal, 2005. "Determinants and effects of foreign direct investment: evidence from German firm-level data," Economic Policy, CEPR, CES, MSH, vol. 20(41), pages 52-110, 01. [Downloadable!] (restricted)
  6. Kimberly A. Clausing & Cosmina L. Dorobantu, 2005. "Re-entering Europe: Does European Union candidacy boost foreign direct investment?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 13(1), pages 77-103, 01. [Downloadable!] (restricted)
  7. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June. [Downloadable!] (restricted)
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  8. Bevan, Alan A. & Estrin, Saul, 2004. "The determinants of foreign direct investment into European transition economies," Journal of Comparative Economics, Elsevier, vol. 32(4), pages 775-787, December. [Downloadable!] (restricted)
  9. Hensher, David A. & Greene, William H., 2002. "Specification and estimation of the nested logit model: alternative normalisations," Transportation Research Part B: Methodological, Elsevier, vol. 36(1), pages 1-17, January. [Downloadable!] (restricted)
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