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FDI and Democratic Governance, Evidence from a Panel VAR Model
Unformatted Document Text:  that could be explained by other independent variables, making it harder to find statistically significant results” (Li and Reuveny 2003). Hence, PVAR approach can be described as conservative. Next, I will introduce the variables used in the model. To facilitate presentation, I denote each variable with a formal name. Variable FDIINFLOW_GDP denotes the yearly value of net inflows of foreign direct investments as a percentage of a country’s GDP for each country. Using the percentage of FDI in GDP allows me to take the relative economic size into account. The FDI_DEMOC variable, which denotes the yearly value of FDI inflows from democratic countries as a percentage of a country’s GDP for each country, could be obtained by multiplying FDIINFLOW_GDP with the percentage values of FDI inflow from developed countries. FDI inflows data is from UNCTAD FDI dataset (UNCTAD 2006). GDP data is from WDI dataset. The percentage data of FDI inflows from developed countries is from World investment directory (World investment directory 1999, 2000, 2004) and World investment report (2006). According to World Investment Directory and Report, all the developed countries in their records are all full democracies. The second variable is DEMOC (democracy), which denotes the level of democracy for a country in any given year. What I interested in is not general regime change, but overall improvements in the quality of democracy. Any gradual strengthening or weakening of democracy is crucial for developing countries. So in this study the democracy variable is a continuum, ranging from a fully autocratic regime at one end, to a fully democratic regime at the other. Thus I adopt Polity IV dataset. This widely used dataset assesses various authority characteristics of states in a world system 14

Authors: Sun, Feng.
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that could be explained by other independent variables, making it harder to find
statistically significant results” (Li and Reuveny 2003). Hence, PVAR approach can be
described as conservative.
Next, I will introduce the variables used in the model. To facilitate presentation, I
denote each variable with a formal name. Variable FDIINFLOW_GDP denotes the yearly
value of net inflows of foreign direct investments as a percentage of a country’s GDP for
each country. Using the percentage of FDI in GDP allows me to take the relative
economic size into account. The FDI_DEMOC variable, which denotes the yearly value
of FDI inflows from democratic countries as a percentage of a country’s GDP for each
country, could be obtained by multiplying FDIINFLOW_GDP with the percentage values
of FDI inflow from developed countries. FDI inflows data is from UNCTAD FDI dataset
(UNCTAD 2006). GDP data is from WDI dataset. The percentage data of FDI inflows
from developed countries is from World investment directory (World investment
directory 1999, 2000, 2004) and World investment report (2006). According to World
Investment Directory and Report, all the developed countries in their records are all full
democracies.
The second variable is DEMOC (democracy), which denotes the level of
democracy for a country in any given year. What I interested in is not general regime
change, but overall improvements in the quality of democracy. Any gradual
strengthening or weakening of democracy is crucial for developing countries. So in this
study the democracy variable is a continuum, ranging from a fully autocratic regime at
one end, to a fully democratic regime at the other. Thus I adopt Polity IV dataset. This
widely used dataset assesses various authority characteristics of states in a world system
14


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