5. Nate Jensen (2003), a professor of Political Science at the University of Tex

Question

5. Nate Jensen (2003), a professor of Political Science at the University of Texas at Austin, was curious about the impact of political regime on the inflows of foreign direct investment (FDI). In a nutshell, FDI is global investment made by multinational corporations. From UNCTAD website, he measures FDI inflows as a percentage of GDP each year for each country. As for democracy, he utilizes the polity IV score, which measures the democaticness of a country at a given year. He ran a regression analysis while controlling for market size (GDP), economic performance (growth), the level of globalization (trade), the level of development (GDP per capita), government spending (consumption), and budgetary constraints (budget deficits). The following table is his outcome table. (30 points)

i) Interpret the results for the effect of democracy on FDI flows in Model 7.

ii) Evaluate the Model 7 in terms of R-sq (R2).

* Please keep this in mind that the example used in question 5 can be changed.

TABLE 52 Time-Series-Cross-Sectional Analysis Trade Level of Development Budget Deficits Govemment Consumption -0001 Time Dummies Country Dummies Observations '-99% confidence level, .. = 95% confidence level." 90% confidence level

Explanation / Answer

a) Democracy is the explanatory variable and FDI is the dependend variable. Going by the 7th model, if democrcy will increase by one unit, FDI will increase by 0.021 units.

b) R-sq tells us about how fit the model is. So R-sq of 7th model is .61 or 61%. So it means the 61 % of the variation in dependent variable that is FDI can be explaned by the explanatory variables of the model.

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