Hello Everyone,
I am working on studying the relationship between military expenditure (independent variable) and FDI inflow (dependent variable) using the panel of 63 countries spanning the period 1990-2018.

I think that the level of FDI inflow in year t will be impacted by the level of FDI inflow in the year (t-1). Thus, I was thinking of adding lagged FDI as one of my control. So one question is:

I) Is it reasonable to add lagged FDI as a control?

More importantly, my control variables include macroeconomic series like Inflation, Openness to Trade, GDP per capita growth rate, etc. I came across some papers (Cho, H.C. and Ramirez, M.D., 2016 and Bashier, A.A. and Siam, A.J., 2014) where they test for panel unit roots and co-integration. As an undergraduate student, I have taken a couple of Econometrics courses. But I had never come across any examples where the stationarity of the dependent variable was checked. I explored a couple of textbooks (Woolridge and Stock and Watson) but did not find this approach described in these books. Do you think it is necessary that I follow this route for my project? Also, since my data is an unbalanced panel due to a missing data problem, I found that there are only two different tests that allow me to check for panel stationarity.


Any suggestions would be helpful.


Best,
Prashant Bhandari