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In this study, we evaluate the effects of health costs on FDI (foreign direct investment) inflows based on a two-stage panel data model using both low- and middle-income and high-income countries data from 1995 to 2010. We hypothesize that total health expenditure is a proxy of direct cost of health and TFP (total factor productivity) is a proxy of indirect cost of health. We first estimate TFP based on an estimation of Cobb-Douglas production function. Then in the first stage model, we obtain the health elasticity of TFP, that is, the effect of health on TFP. In the second stage model, we regress FDI inflow on total health expenditure and TFP after controlling for other factors. The effect of direct cost of health on FDI inflow is captured by the coefficient estimate of total health expenditure. The effect of indirect cost of health on FDI inflow is obtained by multiplying the elasticity of FDI inflow with respect to TFP and the health elasticity of TFP. Our results suggest that overall both direct and indirect cost of health have significant and positive impact on FDI inflows. A 1% increase in health expenditure is associated with a 1.8% increase in FDI inflow and a 1% increase in life expectancy is associated with FDI inflow increase of 1.4%. But differences do exist among low- and middle-income countries and high-income countries.


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