I am doing a research on foreign direct investment in the EU countries. I came across an article in which the authors assign 4 values to a dummy variable, to be more specific, they assign the value 0 for the years before an event and values of 1, 2 or 3 depending on a country's announced EU accession potential after the event.
I am thinking of doing something similar for my research. I will create a variable taking the value zero before a country’s entrance announcement, one after the announcement and two after the official EU accession.
I have three questions concerning that:
- Would you say that the authors were right in calling their announcement variable a dummy variable?
- Do you see any problems with my approach? The other option I came up with is to create separate dummy varibles for a country's entrance announcement and it's actual accession.
- I might also have an independent variable for trade costs. Would including EU accession in the regression be a problem since there might be some collinearity between the two - trade costs decreasing after entering the EU?