Outward Foreign Direct Investment and Economic Development

Abstract

Outward Foreign Direct Investment (OFDI) is in the nature of international relocation of production. OFDI acts as a complementary input in the host country and hence aims at rational allocation of global resources. The pattern of economic development on a multilateral scale would, thus, determine the pattern of OFDI. We consider the effect of economic development on OFDI from developing countries with a set of socio-economic variables. Using the Principal Component Analysis, we construct a set of six composite indices, namely, human resource, infrastructure, labor, market, trade openness and resource, as determinants of OFDI. We use a Panel Regression approach both in terms of OFDI stock and flow. The period of study is 1990-2009. The empirical results indicate that developing countries outflow has not been growing significantly. Although, in growth terms, top ten countries indicate a significant growth rate of 8 percent per annum. Infrastructure is a single variable whose elasticity is slightly over one in the case of top ten countries and is highly significant. Therefore, the FDI outflow is going from those countries amongst developing countries that have a significant infrastructure base.