Multilevel determinants of FDI: A regional comparative analysis

Abstract

This study examines firm-, country-, and regional-level determinants of inward foreign direct investment (IFDI) in a three-level logit framework using data on 134 countries. Countries are divided into eight distinct global regions based on their geographic proximity and similarity in macroeconomic settings. The intraclass correlation coefficients (ICCs) at both the country and regional levels are significant, supporting the efficacy of a three-level model. After controlling for the endogeneity of some firm-level variables, several of the obstacles faced by firms are found to significantly (and negatively) affect IFDI: communication, finance, and institutional quality. Surprisingly, however, obstacles related to physical infrastructure seem to attract foreign investment in some regions, and those relating to administration uniformly encourage foreign investment. This suggests that foreign participation is likely a means of bypassing administrative obstacles (likely because foreign-invested firms are more likely to elicit exceptional treatment). The relative consistency in the effects of firm-level attributes is not reproduced for country-level attributes such as capital account openness, gross domestic product (GDP) per capita, inflation, and the tax rate on profits. These variables are shown to have varying impacts across regions—positive in some, negative in others, and statistically irrelevant in others. The regional-level variable, intraregional trade relative to regional GDP, is found to be positively associated with foreign participation in the aggregate model. However, that relationship is reproduced at the regional level for only two regions (Latin America and the Caribbean and South Asia) and is contradicted at that level for Central Asia.