Innovation and foreign direct investment attraction in developing countries

Abstract

The present study investigates the relationship between innovation (INN) and foreign direct investment (FDI) attraction across 66 developing countries from 2013 to 2021. Adopting the Difference Generalized Method of Moments estimation, the study reveals a statistically positive INN-FDI nexus. Panel Granger causality analysis further indicates a bidirectional between the two variables. Additionally, via feature importance analysis, it is evident that market size, labor resources, and financial development play a critical role in strongly influencing FDI inflows, while innovation shows smaller magnitude. Furthermore, trade openness demonstrates a significantly positive impact on FDI with low impact, while inflation has an insignificantly negative effect on FDI. Policy implications are also discussed.