The Political Economy of FDI 597 tions on sovereign debt ratings.The first three tests confirm the hypothesis that democratic institutions are associated with higher levels of FDI inflows,and the final test highlights the link between democracy and credibility. Empirical Analysis-Cross-Sectional Results The first set of tests is a cross-sectional ordinary least squares (OLS)regression for 79 countries using White's correction for heteroscedasticity on the determi- nants of FDI.34 To mitigate problems of reverse causality,all independent vari- ables are lagged,either using averages for the 1980s for most of the economic variables,or a 1990 measure for most of the political variables. The cross-sectional regression equation is: NET FDI INFLOWS1990-97 =a+B (INDEPENDENT VARIABLES1980-89)+8 The dependent variable,the average net FDI inflows as a percentage of GDP from 1990-97,is taken from the World Bank's World Development Indicators 1999. Net FDI inflows should not be confused with overall net FDI flows.Net FDI flows are total FDI inflows of foreign capital minus total FDI outflows of domestic cap- ital.The theoretical work cited in this article only makes reference to a country's ability to attract foreign capital,not to the policies or institutions that influence domestic investors to move capital abroad.The dependent variable,net FDI in- flows,is a measure of the change in the position of foreign investors in a country. A country with a positive FDI inflow position is attracting new FDI investment, while a country with a negative position is experiencing an outflow of foreign capital.This net inflows measure of FDI is the best measure to examine a coun- try's ability to attract FDI. The econometric work on FDI inflows in the economics literature provides a baseline model with which to begin exploration of the political determinants of FDI flows.These studies find that market size,investment and trade costs,and the relative skilled labor abundance of the parent country are all important factors.35 Unfortunately,data limitations for a number of developing countries constrain the possible empirical tests.Dyadic FDI figures-information on the country source and country destination of FDI-are generally not available for most developing countries.Given this limitation,I include economic control variables that are grounded in existing economic and business school theories,including:DEVELoP- 34.Transition economies are not included in this sample. 35.See Markusen 1998a and 1998b;and Markusen and Maskus 1999a and 1999b.tions on sovereign debt ratings+ The first three tests confirm the hypothesis that democratic institutions are associated with higher levels of FDI inflows, and the final test highlights the link between democracy and credibility+ Empirical Analysis—Cross-Sectional Results The first set of tests is a cross-sectional ordinary least squares ~OLS! regression for 79 countries using White’s correction for heteroscedasticity on the determi￾nants of FDI+ 34 To mitigate problems of reverse causality, all independent vari￾ables are lagged, either using averages for the 1980s for most of the economic variables, or a 1990 measure for most of the political variables+ The cross-sectional regression equation is: NET FDI INFLOWS1990–97 5 a 1 bi~INDEPENDENT VARIABLES1980–89! 1 «i The dependent variable, the average net FDI inflows as a percentage of GDP from 1990–97, is taken from the World Bank’s World Development Indicators 1999+ Net FDI inflows should not be confused with overall net FDI flows+ Net FDI flows are total FDI inflows of foreign capital minus total FDI outflows of domestic cap￾ital+ The theoretical work cited in this article only makes reference to a country’s ability to attract foreign capital, not to the policies or institutions that influence domestic investors to move capital abroad+ The dependent variable, net FDI in- flows, is a measure of the change in the position of foreign investors in a country+ A country with a positive FDI inflow position is attracting new FDI investment, while a country with a negative position is experiencing an outflow of foreign capital+ This net inflows measure of FDI is the best measure to examine a coun￾try’s ability to attract FDI+ The econometric work on FDI inflows in the economics literature provides a baseline model with which to begin exploration of the political determinants of FDI flows+ These studies find that market size, investment and trade costs, and the relative skilled labor abundance of the parent country are all important factors+ 35 Unfortunately, data limitations for a number of developing countries constrain the possible empirical tests+ Dyadic FDI figures—information on the country source and country destination of FDI—are generally not available for most developing countries+ Given this limitation, I include economic control variables that are grounded in existing economic and business school theories, including: develop- 34+ Transition economies are not included in this sample+ 35+ See Markusen 1998a and 1998b; and Markusen and Maskus 1999a and 1999b+ The Political Economy of FDI 597