Determinants of foreign direct investment in fast-growing economies: evidence from the BRICS and MINT countries

Simplice Asongu,Salisu R Isihak,Uduak S Akpan

doi:10.1186/s40854-018-0114-0

Abstract

The flow of foreign direct investment (FDI) into a country can benefit both the investing entity and host government. This study employed panel analysis to examine the factors that determine the direction of FDI to the fast-growing BRICS (Brazil, Russia, India, China, and South Africa) and MINT (Mexico, Indonesia, Nigeria, and Turkey) countries. First, we used a pooled time-series cross sectional analysis of data from 2001 to 2011 to estimate and model the determinants of FDI for three samples: BRICS only, MINT only, and BRICS and MINT combined. Then, a fixed effects approach was employed to provide the model for BRICS and MINT combined. The results demonstrate that market size, infrastructure availability, and trade openness play the most significant roles in attracting FDI to BRICS and MINT, while the roles of availability of natural resources and institutional quality are insignificant. To sustain and promote FDI inflow, the governments of BRICS and MINT must ensure that their countries remain attractive for investment by offering a level playing field for investors and political stability. BRICS and MINT governments also need to invest more in their human capital to ensure that their economies can absorb substantial skills and technology spillovers from FDI and promote sustainable long-term economic growth. This study is significant because it contributes to the literature on determinants of FDI by extending the scope of previous studies that often focused on BRICS only.

Highlights

Investment—whether public or private, domestic or foreign—is crucial to the socio-economic transformation of any economy
Proponents of the classical theory maintain that foreign direct investment (FDI) can be beneficial to the domestic economies of less developed countries through a number of mechanisms: improvement in the balance of payments; transfer of capital, skills, and advanced technologies; growth of foreign exchange earnings; expansion of the tax base resulting from exports related to FDI; integration of the domestic economy into international markets; and development of domestic infrastructure (Toone 2013)
In 2011, BRICS and MINT together accounted for 51% of the global population, attracted 30% of global FDI, and contributed 19% of global Gross Domestic Product (GDP)

Summary

Introduction

Investment—whether public or private, domestic or foreign—is crucial to the socio-economic transformation of any economy. In the 1970s and 1980s, many developing countries imposed trade restrictions and capital controls designed to protect domestic industries from the domineering influence of their foreign counterparts and to conserve foreign exchange reserves (de Mello 1997; Dupasquier and Osakwe 2006). These policies resulted in a distortion of social and private return on capital that reduced foreign direct investment (FDI) flows into their respective countries (de Mello 1997) and impaired economic growth (Rodrik 1998). The literature on FDI spillovers, which has been documented substantially, provides insight that spillover effects take many forms, including better working methods, good management skills, more employment, domestic financial development, and higher productivity gains (Javorcik 2004; Asongu and De Moor 2017)

Methods

Results

Conclusion