The Evolving Framework of Determinants of Foreign Direct Investment: A Review of Literature

Abstract

The last two decades have witnessed intense competition among countries, particularly developing economies, to attract foreign direct investment (FDI). This is because FDI fills the gap between desired investment and domestic private investment and helps them to acquire new technology and managerial skills. This paper attempts to understand the evolution of FDI theory along with changes in the significance of determinants of FDI over a period of time. An analysis of the extant literature shows that factors such as market size and per capita incomes have remained important determinants of FDI decisions both traditionally as well as in contemporary times. However, some factors such as resources, trade openness and FDI openness have now become secondary factors influencing FDI. Other factors which were earlier secondary but have now gained prominence as FDI determinants are infrastructure; institutional factors such as corruption and political stability; and tax related variables. The above review provides us insights into the changing aspects of FDI decision-making and can provide useful inputs to policy makers regarding the areas which need focus for creating a congenial climate for FDI