The interest rate has also been considered as a factor influencing direct investment. Wei and Liu (2001) indicated that there are economic linkages between FDI and the cost of borrowing. If the cost of borrowing in the home country is lower than in the host country, home country firms have a cost advantage over their rivals in the host economy, and are in a better position to enter the host country through FDI. Several empirical studies have supported this relationship (Farrell et al., 2000; Pan, 2003). However, the analyses by Bevan and Estrin (2004) and Onyeiwu and Shrestha (2004) fail to support this hypothesis for FDI inflows to Africa and to East and Central European transition economies.
Hypothesis3. The lower the interest rate in the home countries relative to the host country, the higher will be the level of FDI in the host country.