Determinants of Inward Foreign Direct Investment: A Dynamic Panel Study

Abstract

Most recent studies of the factors that determine flows of foreign direct investment have focused on bilateral flows of FDI using a wide array of possible variables. Recent studies of the aggregate flows of FDI (flows from all sources) have been limited in the type and number of countries included. This study adds to these results by using a panel data set that includes 74 countries for the period 1980–2008 over a wide-range of countries. An important result of this study is that the relationship between FDI and measures of market size and income is non-linear. To study the effects of country specific characteristics this study looks at the relationship between the average country residual from the panel estimates and various measures of business climate.