What robustly determines FDI in emerging markets and developing countries? A sensitivity analysis

Abstract

What determines Foreign Direct Investment (FDI) inflows remains a primary concern of economists and policy makers; yet the uncertainty surrounding FDI theories and empirical approaches has created ambiguity regarding the determinants of FDI. This paper applies Leamer’s (1983, 1985) traditional Extreme Bounds Analysis (EBA) as well as the Sala-I-Martin modified form of EBA to identify the robust determinants of FDI using cross-sectional data (averaged for the period of 1985-2016) covering 103 emerging and developing countries. We consider 33 potential economic, political and institutional determinants. To address concerns about multicollinearity, the VIF restriction specifies that only estimates with VIF below five are reported. The results show that all variables of interest are fragile determinants of FDI when using traditional EBA. Yet, when applying the Sala-i-Martin EBA, nine robust variables are revealed. Some policy implications are discussed.