Identifying the robust economic, geographical and political determinants of FDI: an Extreme Bounds Analysis

Abstract

Understanding what determines Foreign Direct Investment (FDI) inflows remains a primary concern of economists and policy makers; yet the uncertainty surrounding FDI theories and empirical approaches has created ambiguity regarding the determinants of FDI. This paper applies Extreme Bounds Analysis to identify the robust determinants of FDI using panel data covering 168 countries from 1970 to 2006. We consider 58 potential economic, geographic and political determinants and find that almost one-third are robust, including: openness, education, government spending, corporate tax rate, infrastructure, experience of conflict, democratic governance, natural resources, geographic location, number of borders, coastal location and language.