VAR Analysis Between Interest Rates and Foreign Direct Investment Inflows in OECD Countries

Abstract

This paper aims to analyze the correlation and causality between the inflows of foreign direct investments and the interest rate in OECD countries. The scientific methodology applied in this study is quantitative methods through econometric models, and the data are analyzed through dynamic panels and time series. The sample of this scientific paper includes 38 OECD member countries for the 14-year time period (2009–2022). The independent variables of this study are interest rate, GDP, exports, loans, inflation, and market liberalization, whereas the dependent variable is the incoming flows of foreign direct investments in OECD countries. The statistical tests that have been applied to verify the validity of the hypotheses of this study are linear regression, random effect, fixed effect, Hausman–Taylor Regression, GMM—Arellano Bond Estimation Model, Generalized Estimating Equations, VAR analysis (Vector Autoregression Model), Granger Causality Wald Test, and Johansen Cointegration Test. According to the results of this study, we can conclude that there is a positive correlation and long-term causality between FDI inflows and interest rates in OECD countries. Also, according to panel econometric models, we can conclude that interest rates, loans, market liberalization, exports, and economic growth have a positive impact on FDI inflows, while inflation has a negative impact. The empirical findings of this study will serve as a reference basis for the governments of OECD countries, and other countries to design appropriate strategic policies at the macroeconomic level in order to create a stable and safe economic environment. Such an economic environment will affect the optimal level of interest rates, the increase in the volume of FDI inflows, and the sustainable economic growth of the OECD countries.