Determinants of US investment in real estate abroadFariborz Moshirian *, Toan Pham School of Banking & Finance, The Uni6ersity of New South Wales, Sydney, NSW 2052, AustraliaReceived 22 January 1998; accepted 22 April 1999Abstract：The purpose of this paper is to analyse and discuss those factors which are contributing to the expansion of US FDI in real estate. The empirical results of this model of FDI in real estate show that as US foreign financial liabilities increase, there is an accompanying increase in its FDI in real estate. This result is consistent with the study by Russekh, F., Ruffin, R.,1986. The role of foreign direct investment in US capital flows. Am. Econ. Rev. 76,11271130, who showed that US FDI abroad is a substitute for US financial assets. Furthermore, the empirical results indicate that as returns from the US stock market decline, there are more incentives for US investors to invest in foreign real estate. The empirical results also show that US financial wealth, US FDI in manufacturing and banking and US bilateral trade contribute positively to the expansion of US FDI in real estate. 2000Elsevier Science B.V. All rights reserved.Keywords: Real estate; Foreign direct investment; Stock market1. IntroductionSince the early 1980s, according to the World Investment Report (United Nations, 1997), world-wide flows of foreign direct investment (FDI) have grown at unprecedented rates, to reach a total outflow of about $420 billion in 1996. The annual average growth rate of FDI has been 33% between 1987 and 1996 which far exceeded that of merchandise exports (12%) and nominal GDP (12%).US FDI abroad is categorised into several industries. One of the categories of US FDI abroad is FDI in real estate, as opposed to FDI in manufacturing, banking, etc. While it is observed that US FDI in real estate is small, it has increased by more than four times over the period 19851997. There are five major countries in which the US has invested in real estate. These are Canada, the UK, Mexico, France and Italy. In 1997, almost 39% of the US FDI abroad in real estate was in the UK, 21% in Canada, 12% in Mexico, 3% in France and 3% in Italy.Real estate investment has long been confined to markets with which investors are familiar. International diversification was not on the agenda as Webb (1984) found in a comprehensive survey of US institutional investors attitudes in the 1970s and early 1980s. They appeared to diversify only over different property types and regions within their home country. However, in the 1980s growing amounts of money were being invested abroad in many industries, including real estate. This is the first study of FDI in real estate which attempts to provide an analysis and an explanation for the determinants of US investment in real estate abroad over the period 19851995. The unpublished quarterly data on US FDI in real estate, manufacturing and banking make such a study possible. According to an unofficial definition of the US Department of Commerce, FDI in real estate covers investment by US private investors in real estate including domicile, commercial building1.The paper is structured as follows: Section 2 reviews some of the relevant literature in FDI; Section 3 proposes various factors which could determine US FDI in real estate; Section 4 models US FDI in real estate; Section 5 describes the sources of data and the methodology used in this paper; Section 6 reports the empirical findings; and Section 7 makes some concluding remarks.2. Literature reviewThere have been a number of studies on FDI in general, in manufacturing, banking and insurance. However, there has not been a study of FDI in real estate. This section of paper intends to survey some of the most relevant FDI studies which are relevant to FDI in real estate2.Williams (1997) recently surveyed various established theories of FDI in the context of multinational banking. In this survey he discussed major FDI theories such as the international investment theory, the eclectic theory and the industrial organisation hypothesis; however, most studies of FDI have been based on the eclectic theory as a means of measuring the most significant determinants of FDI. Some studies of FDI have highlighted one or two as the main determinants of FDI abroad. For instance, studies by Cushman (1987), and Froot and Stein (1991) identified the effects of exchange rates on FDI as the main determinant factor for FDI abroad. Studies such as Nigh (1986) argued that the size of the market in the host country is the most significant factor for FDI abroad. Schneider and Frey (1985) considered the balance of payment as the most significant determinant of FDI abroad. Furthermore, some studies found more than one factor as the major determinants of FDI abroad. Studies such as Culem (1988) found that the host market size, the market growth rate, unit labor cost, trade flows and economies of scale are the major determinants