Determinants of inward foreign direct investment: Comparison across different country groups

Abstract

This paper analyses the factors determining inward foreign direct investment, particularly the role of natural endowments and economic and political characteristics of the host country. It expands on the existing literature by focusing on four broad groups of countries: advanced, emerging-market, developing and transition economies, comprising of more than 100 countries in a panel data setting for the period 1996 – 2016. The paper also examines the scenario during the major economic crises ‒ Asian crisis, Dotcom Bubble, Global Financial crisis and Sovereign Debt crisis. The results indicate that the determinants of inward foreign direct investment have changed over time and that the patterns are not uniform across the four country groups. Furthermore, the paper compares the determinants of two major country groups, namely ‒ emerging-market and developing countries by conducting Chow test for equality of coefficients. It is seen that the economic growth and market size has a stronger positive influence on inward FDI flow to emerging-market than to developing economies. Also, emerging-market economies experienced a smaller flow of FDI during Global Financial crisis compared to developing economies. These results have important implications for the policy makers as they can help to identify the regional factors that attract capital inflows.