Abstract
Foreign Direct investment (FDI) is considered to be an important source of capital especially in developing countries. FDI supplements local savings and brings a series of benefits in host countries. This research has focused OIC on countries since these countries are still far behind in attracting FDI compared to other developing countries. OIC member countries inhibit diversity in their resources from resource rich to resource poor countries. They lack behind the developed world in terms of economic development pertaining to weak economies. Since for these types of countries FDI can prove to be a vital source of capital, it becomes important to study the factors that affect it. This study exactly does the same by incorporating a series of determinants (inflation, size of the economy, trade openness, infrastructure, and institutional quality) to assess the impact they have in attracting FDI. We have used data for 42 countries spanning over 1996-2013. The choice of data selection has been dictated by data availability. For estimation we have used panel fixed effects and random effects estimators. Our results indicate that size of economy, infrastructure and trade openness are positively and significantly related in attracting FDI in those countries. Institutions on the other hand are negatively related. The effects of inflation are somewhat mixed according to our estimation and not robust. The implications of our findings are that policy makers should expend efforts in making more trade oriented policies, improve infrastructure and increase the size of economy.
Highlights
Knowledge of the factors that influence foreign direct investment (FDI) (Note 1) has attracted the attention of economists and policy makers for the last few decades. This is especially true for developing countries since one of the remarkable features of globalization is the flow of FDI in these countries which is considered to be an important source of development finance
Economic theory postulates that inflation, market size, trade openness, infrastructure and institutions are important variables in developing an understanding of the behavior of FDI
This paper has investigated the links between FDI and it various determinants in a panel of 42 OIC countries
Summary
Knowledge of the factors that influence foreign direct investment (FDI) (Note 1) has attracted the attention of economists and policy makers for the last few decades This is especially true for developing countries since one of the remarkable features of globalization is the flow of FDI in these countries which is considered to be an important source of development finance. Over the last three decades, foreign capital sources including FDI have played a vital role and accounting for a significant share of the total investment in many developing countries including OIC members. Given this state of affairs, it seems that most of the OIC countries are still not able to create a favorable economic environment and to provide the required conditions to attract more FDI flows To achieve this goal, reforms are needed to improve the business climate and to introduce investment incentives for foreign investors. This study will fill the gap in this area by providing more recent evidence
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