FDI Inflows and Urbanization: A Cross-country Comparison from Asia, Africa and Latin America

Abstract

Since the last three decades, urbanization has been considered an engine of economic development and attracting foreign investment, particularly for developing countries. We explore the role of urbanization upon inward foreign direct investment (FDI) for a panel of 58 developing economies from Asia, Africa and Latin America. Empirical results reveal a complementary relationship between urbanization and FDI. Moreover, empirical findings suggest that urbanization in developing economies reaps positive benefits from FDI, provides MNCs with a safe investment climate and facilitates FDI inflows. Further, empirical results reflect the role of sociopolitical openness and infrastructure (in particular, energy and transport) in fostering FDI inflows. We suggest fostering appropriate infrastructure and sociopolitical openness will accelerate urban development and create a conducive environment for FDI inflows. Governments and policy practitioners should implement policies to mobilize foreign capital to accelerate urbanization.