Robust determinants of OECD FDI in developing countries: Insights from Bayesian model averaging

Nikolaos Antonakakis,Gabriele Tondl,Caroline Elliott

doi:10.1080/23322039.2015.1095851

Abstract

In this paper, we examine the determinants of outward FDI from four major OECD investors, namely, the US, Germany, France, and the Netherlands, to 129 developing countries classified under five regions over the period 1995–2008. Our goal is to distinguish whether the motivation for FDI differs among these investors in developing countries. Rather than relying on specific theories of FDI determinants, we examine them all simultaneously by employing Bayesian model averaging (BMA). This approach permits us to select the most appropriate model (or combination of models) that governs FDI allocation and to distinguish robust FDI determinants. We find that no single theory governs the decision of OECD FDI in developing countries but a combination of theories. In particular, OECD investors search for destinations with whom they have established intensive trade relations and that offer a qualified labor force. Low wages and attractive tax rates are robust investment criteria too, and a considerable share of FDI is...

Highlights

Since the mid 1990s OECD countries have begun placing an increasing share of their foreign direct investments (FDI) into developing countries (DC), in Eastern Europe and Central Asia (ECA), East and South Asia (ESA), Latin America and Caribbean (LAC), Middle East and North Africa (MENA), and in Sub-Saharan Africa (SSA).Concentrating among the major OECD investors, namely, the US, Germany, France, and the Netherlands, we see that their presence, in the regions mentioned above, varied substantially.1 As an indicator for FDI commitment in a country, we consider the amount of outward foreign direct investment stocks in that destination per inhabitant of the investor country
In this paper, we examine the determinants of outward FDI from four major OECD investors, namely, the US, Germany, France, and the Netherlands, to 129 developing countries classified under five regions over the period 1995–2008
The aforementioned studies, we focus on bilateral FDI stocks of major OECD investor in 129 developing countries classified under five geographical regions over the period 1995–2008

Summary

Introduction

Since the mid 1990s OECD countries have begun placing an increasing share of their FDI into developing countries (DC), in Eastern Europe and Central Asia (ECA), East and South Asia (ESA), Latin America and Caribbean (LAC), Middle East and North Africa (MENA), and in Sub-Saharan Africa (SSA).Concentrating among the major OECD investors, namely, the US, Germany, France, and the Netherlands, we see that their presence, in the regions mentioned above, varied substantially. As an indicator for FDI commitment in a country, we consider the amount of outward foreign direct investment stocks in that destination per inhabitant of the investor country. Since the mid 1990s OECD countries have begun placing an increasing share of their FDI into developing countries (DC), in Eastern Europe and Central Asia (ECA), East and South Asia (ESA), Latin America and Caribbean (LAC), Middle East and North Africa (MENA), and in Sub-Saharan Africa (SSA). In 1995, the Netherlands had by far the most intensive FDI activity in DC, ahead of other European countries and the US. Both the Netherlands and the US invested primarily in ESA and LAC. Germany engaged mostly in LAC, while its commitment in ECA and ESA was only half as high. SSA and MENA were virtually neglected by all OECD investors

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Conclusion