Political Instability and Foreign Direct Investment: The Motor Vehicle Industry, 1948-65

Abstract

In recent years much research has analyzed the impact of international investments on the development of countries. Yet, the question why investments are made in some countries and not in others has received little attention. This research evaluates the impact of political instability on the international expansion of motor vehicle production between 1948 and 1965. For the dependent variable, countries that became producers in this time period are scored 1 and nonproducers are scored 0. A model is developed and tested with Ordinary Least Squares, Weighted Least Squares, and Probit estimation techniques. With all techniques, once market size and a nation's development level are controlled, political instability has only a weak negative effect on the chances of a country becoming a producer. The regression equations produce estimated probabilities of producer status for individual countries. About 95 percent of the 84 countries studied are correctly classified.

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