Power prices and FDI attractiveness: A dynamic panel data analysis on 90 countries and the ASEAN-5
Date
2017-05-27
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Abstract
Concerns over increasing power prices have gained course in recent years in the context of international competitiveness in the ASEAN region. Unstable energy supply and high power prices can negatively impact energy-intensive industries and can therefore reduce the attractiveness of a country for foreign direct investment inflows (FDI). This paper bridges the literature gap on power prices as a potential locational determinant of FDI inflows using a dynamic panel analysis. First, we use two-step system generalized method of moments (SYS-GMM) for our cross-country regression (data on 90 countries over the period 2000-2014) as it allows for “small T, big N” type of data. Second, for our ASEAN-4 regression, we conducted instrument variable two-stage least squares (IV 2SLS) as it allows for few time periods and few groups. Both methods provide for dynamic estimations. The results of this paper confirm that power prices serve as a deterrent to FDI inflows.
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Keywords
foreign direct investment, electricity prices, generalized method of moments