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Empirical investment equations in developing countries

  • Rama, Martin

Since the debt crisis, there has been increasing interest in the determinants of investment in developing countries. There is plentiful literature on the topic for industrial economies but existing studies on developing countries are scattered and few. The author examined those studies with the aim of answering two questions: Are the variables that influence investment decisions the same in developing as in industrial countries, or should other factors be considered because the macroeconomic setting is different? And what can be learned from the applied research that has been done on the subject? This paper presents an integrative analytical framework, including different empirical equations, that depend on the assumptions made about the economies'key features. It classifies 25 empirical studies on investments in developing countries, classifying them according to their chosen specification and comparing their estimates. The author concludes that investment decisions in developing countries are not necessarily based on the same variables as in industrial countries. Analysts must consider such additional factors as financial repression, shortage of foreign exchange, lack of infrastructure, and significant economic instability.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 563.

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Date of creation: 31 Dec 1990
Date of revision:
Handle: RePEc:wbk:wbrwps:563
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  9. Lim, David, 1987. "Export Instability, Investment and Economic Growth in Developing Countries," Australian Economic Papers, Wiley Blackwell, vol. 26(49), pages 318-27, December.
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  24. LICANDRO Omar, 1990. "Uncertainty and Tobin’s Q in a Monopolistic Competition Framework," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1990003, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
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