Inflow and Outflow Potentials of Foreign Direct Investment in the Russian Economy: Numerical Estimation Based on the Gravity Approach

The aim of this article is to identify and estimate factors that influence on foreign direct investment (FDI) flows in the modern economy. The basis for empirical analysis is the gravity approach to FDI determinants estimation. For the empirical research we use the database for 47 FDI-importers and 112 FDI-exporters over the period from 2001 to 2011. Comparing different econometric techniques we found out that Poisson pseudo-maximum likelihood method provide the most accuracy in estimation of FDI determinants. As a result of econometric estimation we validate base hypotheses of the gravity model: the size of the countries positively affects FDI flows, while the distance between them affects FDI negatively. The additional determinants of FDI flows are identified: the openness of the FDI importing economy, wage level in the FDI-importer, the level of multilateral resistance for both FDI-importer and exporter, common language between investing countries and also colonial connections in the past. Based on the results of the econometri. estimation, we calculate potential values of FDI import and export flows in the Russian economy. We found out that the actual value of both FDI inflows and outflows are much lower than potential.