Expanded summary

Foreign direct investments play important role in economy of countries. Foreign direct investments play important role especially in developing countries (also in Georgia).

Foreign direct investors are motivated by such factors as low salary, factors that contribute to sale of products such as many inhabitants, high income of individuals, economic growth(increase of real GDP), disposable income, subsidies, imports and exports that in its turn indicate how open is an economy, inflation(consumer price index) and so on. But do this factors play significant role in attraction of FDI to Georgia. In order to answer this question we conducted regression analysis and applied econometrics. Specifically we conducted various tests and according to principles of econometrics we proved that out of many above mentioned factors subset of factors really play relevant role in attraction of FDI to Georgia.

The motivations of investors are different. Dunning, author of eclectic paradigm, grouped the motivations of investors in four groups: market-seeking FDI, efficiency-seeking FDI, resource seeking FDI and strategic asset seeking FDI. Market-seeking foreign direct investors are motivated by sale of products on local market (the easier the sale of products on local markets the more such FDI will be made). So as in Georgia the majority of investors were market-seeking investors (see Vaxtang Charaia who reached this conclusion according to analysis of statistical data in Georgia) and according to Dunning’s characterization of such type of FDI we decided to include in the model as independent variables the following variables: real GDP, gross national disposable income, number of inhabitants. we decided to include also consumer price index(inflation) among other explanatory variables but because of the fact that frequency of this variable was different from frequency of other explanatory variables we decided not to include this variable among other factors that we included in the model. Also because of the above mentioned facts we also decided to include import as independent variable in our model that is conditioned by the following: If imports increase in country then there will be many competitors to foreign investors and they won’t be able to sell as freely products as they would sell if there had not been many importers in the country. but at the same time if there are many importers in the country theoretically this could be positive factor for market-seeking investors because if there are many products in the economy this could result in reduction in expenses for such investors and consequently they would sell many products as the price of their products decrease. Second place according to volume of FDI inflow into Georgia took efficiency-seeking FDI (see vakhtang Charaia who made such conclusion according to analysis of statistical data in Georgia). According to dunning’s eclectic paradigm the motive of such investors is to increase efficiency and reduce various costs. So we decided to include in our econometric model the variable salary as one of explanatory variables. Third place according to inflow of investment in Georgia took resource seeking investments. The latter is motivated by export of products or resources to home country. So we decided to include in the model as additional explanatory variable the variable exports.

After various procedures we decided that final explanatory variables that should be included in the econometric model are salary, population number and imports. The variable salary turned out to have high negative coefficient that could be explained by the fact that we don’t have statistics about strategic asset-seeking FDI and in 2007-2013 efficiency-seeking FDI to 17% of total inflow of FDI into Georgia in this years. We could not find statistics about strategic asset seeking FDI. During such FDI investors are motivated by such factors as skilled and highly competent human capital to whom we should pay high salary logically. Accordingly because of increase of salary such FDI could be hindered significantly because of it that during such FDI investors are motivated by strategic assets as well (one of which is human capital) that would enable foreign investors to compete with local firms. Consequently during such FDI investor should have as low costs as possible in order to set low price on goods in order to have profit anyway. So when salary increase, costs of investor also increase and because of this such FDI could be hindered significantly in Georgia. But one flaw of our approach is it that we considered only salary. It would be better to consider the square of salary that would tell us if the increase of salary decrease such FDI only after salary increases occur when salary is above some high level. Such approach is logical as salary increases would be hindering factor for inflow of FDI when salary increases lead us to high salary and not when salary increases lead us to low level of salary. As efficiency-seeking FDI was low in Georgia and as investors are motivated by reduction of various costs in case of such FDI salary increase that reflects increase of costs would be hindering factor for inflow of FDI in Georgia. But again it would be better to interpret the coefficient of squared salary in such a case the necessity of what is based on logic that we introduced previously with regard to strategic asset-seeking FDI.

With regards to population number, the coefficient of which turned out to be negative and insignificant which contradicts with theory as in Georgia the majority of FDI  was market-seeking FDI. Insignificant coefficient means that inflow of FDI is not affected by change in population number and negative coefficient means that when population number increases FDI decreases that is in contradiction with theory because when population number increases FDI should also increase so we should have positive coefficient. In this case we could have multicollinearity problem but according to variance inflation factor we have very little multicollinearity problem which is not necessarily big problem. But we should keep anyway this variable in the model because high number of population reflects big market (many consumers) and in Georgia the majority of investors were market seeking investors despite of the fact that coefficient of this variable was negative and insignificant.

  With regards to import it is statistically significant, but its sign is not probably correct as majority of FDI into Georgia was market seeking. Though positive coefficient of this variable could be explained by the following: in case of import the quantity of local products increases, consequently prices can decrease and investor could purchase resources in low prices. This is proved by the fact that first place according to FDI volume took market seeking FDI(in case of low prices the sale of products could be easier and at the same time investor could make profit) and the second place took efficiency seeking during which investors are motivated by reduction of various costs.

The practical importance of this article is revealed by the fact that we proved in the model according to Ramsey Reset test that we don’t have omitted variable bias that in its turn reflects it that we kept in the model only relevant explanatory variables/significant explanatory variables and we did not omit significant variables in the model. Accordingly those bodies that work on attraction of FDI and those bodies that create policies for attraction of FDI could attract FDI by paying attention to less procedures and consequently efficiency in attraction of FDI could increase. For example as import proved to be significant factor for attraction of FDI government bodies could pass some reforms in the country that would promote imports for products into Georgia but as the size of this coefficient is low it is not necessary to increase imports by high volumes (also increasing of imports by high volumes is not necessary as this could result in trade deficit and increasing of imports by high volumes could be detrimental for country’s balance of payment). Those bodies could also try to return migrants into Georgia that would increase the number of population in country and this way we could attract significant amount of additional FDI as this factor may be significant factor for attraction of FDI into Georgia because we had high volume of market seeking FDI inflow into the country. But one flaw of our approach is it that it would be better to test sign and significance of salary in squared form because by this way we could find out if salary increase hinders FDI inflow only after salary increase occur after high level of salary and logically this would be better because if salary increase does not occur we could lose many workers from companies that would be deterrent to economic growth after which FDI inflow would decrease into Georgia. In summary efficiency in attraction of FDI could be increased because according to various tests we found out that for example subsidies is not significant factor for attraction of FDI. So government could save and not give subsidies and attract FDI anyway(theoretically subsidies don’t play important role in case of market seeking FDI because government does not play important role in attraction of such FDI and subsidies are given by government and in Georgia majority of FDI inflow comprised of market-seeking FDI).