Determinants of Foreign Direct Investment Inflows in BRICS Nations: A Panel Data Analysis

Abstract

The aim of this study is to determine the most significant factors that lead to continuous rise in the foreign direct investment (FDI) inflows in the five most emerging economies of the world, that is, Brazil, Russia, India, China, and South Africa (BRICS). The present study employs panel data regression analysis to find out the most significant determinants affecting the FDI inflows in BRICS countries as a whole. Under this technique, all the three regression models, that is, common constant (ordinary least square [OLS]), fixed effects, and random effects are tested to explore the determinants of FDI in BRICS countries over a period of 31 years, that is, 1983–2013 (except for Russia whose data is available from 1995–2013 for the selected variables in the study). The empirical results of the modified random effects model reveal that industrial production index (IPI), inflation rates, unemployment rates, trade openness and real effective exchange rate (REER) are significant at 1 percent significance level whereas labor cost is statistically significant at 10 percent significance level which means that these are the most significant determinants in attracting FDI inflows in BRICS countries. This study is significant because there are various researchers who have contributed to the literature of determinants of FDI but there is hardly any study which documents the factors attracting FDI inflows in BRICS countries covering a long period of more than three decades.