Abstract
Foreign direct investment (FDI) is a vital ingredient in achieving sustained growth in the Caribbean region. However, FDI inflows have been affected by issues such as market factors, trade barriers, costs factors, investment climate, political and foreign exchange stability. To this end, this paper examines the factors affecting FDI flows into Caribbean countries. We argue that Small Island Developing States in the Caribbean (SIDSC) can be affected by issues such as their small market size, high cost of energy, proneness to exogenous shocks from commodity prices, natural disasters and climate change. A point to note is that countries in the Caribbean with natural resources are expected to have biased FDI inflows. Additionally, countries throughout the Caribbean have different economic and productive structures and unique issues that can affect them based on their individual characteristics. To this end, a panel Autoregressive Distributed Lagged (ARDL) model is used to determine the factors affecting FDI inflows in the Caribbean over the period 2000 to 2019. The findings reveal that GDP growth, natural resource rents, gross capital formation and population growth are significant factors influencing growth in the Caribbean region.
Highlights
There are a vast number of theoretical and empirical studies on the factors that determine foreign direct investment (FDI) in a country
Our findings reveal that GDP growth, natural resource rents, gross capital formation and population growth are significant factors influencing growth in the Caribbean region
The results indicate that different income groups have different marginal effects on gross capital formation and the first lag of FDI on FDI
Summary
There are a vast number of theoretical and empirical studies on the factors that determine foreign direct investment (FDI) in a country (for some key examples, see Billington 1999; Nunnenkamp 2001; Wolff 2007; Faeth 2008; Türkcan et al 2008; Kolstad and Villanger 2008; Mengistu and Adhikary 2011; Oladipo 2013; Taylor et al 2013; Aziz and Makkawi 2012; Bannaga et al 2013; Zeshan and Talat 2014; Corcoran and Gillanders 2015; Henry et al 2014; Williams 2015; Phung 2016; Khramov 2016; Mahmoodi and Mahmoodi 2016; Daskalopoulos et al 2016; Mamingi and Martin 2018; Sabir et al 2019; Siriopoulos et al 2021). According to Phung (2016), the two major theories that were discussed were based on neoclassical trade theory and internalization theory, respectively The former was introduced in the 1960s and was based on the HO trade model to explain the motives behind investors who operate production chains abroad, but export products back to their home country. Dunning (1977, 1979) combined both the neoclassical trade theory and internalization theory to create the eclectic paradigm ( known as the OLI-Model or OLI-Framework) of FDI, which synthesized the reasons for firms to operate internationally (advantages) and the mode of entry (FDI, export and licensing) This has become a seminal framework and has been widely used as the foundation for empirically examining the determinants of FDI (Nunnenkamp 2001; Faeth 2008; Taylor et al 2013; Phung 2016).
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