Determinants Of Foreign Direct Investment Flows Research Articles

Reverse FDI and knowledge-and-physical-capital model: empirical evidence from emerging economies

PurposeThe main aim of this paper is to verify whether the modern mainstream economic theory of multinational enterprise that explains foreign direct investment (FDI) from developed countries is also able to account for investment decisions of multinational enterprises (MNEs) from emerging economies.Design/methodology/approachUsing Knowledge-And-Physical-Capital (KAPC) model as an analytical framework and Poisson-pseudo maximum likelihood estimation technique, the authors identify determinants of FDI flows from emerging economies. The data set consists of 38 home and 134 host countries during the period 2000–2012. Empirical evidence supports high explanatory power of KAPC model. Further, compared with the earlier Knowledge-Capital (KC) model, results confirm the importance of physical capital.FindingsThe estimation results confirm the hypothesis that mainstream economic theory can explain FDI flows from the emerging economies by highlighting the roles of total market size, skilled-labor abundance, investment and trade costs and geographical distance between two countries.Research limitations/implicationsThis study casts doubt on the alternative way that the KAPC model suggests to distinguish between horizontal and vertical FDI. The argument that horizontal MNE headquarters would be relatively more abundant than vertical MNE headquarters in countries that are abundant in physical capital relative to skilled labor seems reasonable but the idea of variable specification in the estimated equation should be revised.Practical implicationsFirms should be allowed to move their resources freely into and out of specific activities, both internally and internationally across border. To reach that goal, governments of potential host countries can adopt several measures, most importantly remove restrictions on payments, transfers and capital transactions and open previously closed industries to welcome foreign investment. In addition, to improve investment climate in general, governments need to pay attention to enhancing security of property rights, regulating internal taxation (i.e. corporate income tax), guaranteeing adequacy of infrastructure, efficient functioning of finance and labor markets and fighting against corruption.Social implicationsThe location choice of emerging investors set priority on similarity in economic size, geographical and cultural proximity. It is because shared borders or common official languages would reduce information costs and enhance information flows. Also, investors consider horizontal FDI (with motivation to expand market demand) as one of main modes of entry into a foreign market and a substitute for export. Likewise, distance is often understood as an important investment friction.Originality/valueThe outstanding contribution is that the research has uncovered the positive and statistically significant effect of physical capital on FDI activity, which has not been discussed in the earlier KC model. However, at the same time, the study casts doubt on the KAPC model's argument that relative abundance in physical capital to skilled labor between two countries determines FDI types and suggests that this argument and its empirical model specification should be carefully reviewed.

Economic Policy, Political Constraints, and Foreign Direct Investment in Developing Countries

ABSTRACTAs foreign direct investment (FDI) has become increasingly important in the world economy, a large body of literature has emerged regarding the determinants of FDI flows. Some scholars argue that democracy attracts FDI through the mechanism of political constraints, which reduce the risk of negative policy changes. However, the value of policy stability should be conditional on the attractiveness of contemporary FDI-relevant policies. I therefore propose a theoretically more comprehensive argument: political constraints are attractive to investors when the host country policy environment is FDI-friendly, because these political constraints reduce the probability of negative policy changes in the future. When the policy environment is hostile to FDI, on the other hand, political constraints will have little positive effect, and, to the extent they indicate that FDI-relevant policies are unlikely to improve, may even deter FDI. This argument helps explain why the positive relationship between democracy and FDI seems to emerge after a global shift toward FDI-friendly polices. I find robust empirical support for the argument in tests covering more than 100 developing countries from 1970 to 2014, indicating significant effects using a variety of policy and political constraint measures.

SOURCES OF FOREIGN DIRECT INVESTMENT FLOWS TO DEVELOPING ASIA: THE IMPORTANCE OF TIME ZONE

This paper investigates the determinants of foreign direct investment (FDI) flows to developing Asia using bilateral FDI flows for the period 1990 to 2005. We pay particular attention to possible differences in the determinants of FDI flows to developing Asian economies from the rest of the Asia-Pacific region compared to those from nonregional OECD economies, with an emphasis on the role of distance and time zone. We find that the elasticity of distance is much greater for FDI from the non–Asia-Pacific OECD economies than intraregional Asian flows. However, this difference disappears when one accounts for differences in time zones. The world is not flat; differences in time zones appear to act as a hindrance to FDI.

The Determinants of Intra-European Foreign Direct Investment Flows: Market Integration and Policy Issues

SUMMARY This paper reviews the literature on the determinants of foreign direct investment (FDI) and the European Community (EC), especially the few studies concerned with intra-European FDI. It applies international business theory to investigate the determinants of FDI flows within the EC over the period 1984–89. The key results are that the models found contrast with the standard US-EC literature, and also differ within the EC. Real variables assume the greatest importance, although financial variables do appear significant. The pattern of findings suggests that the growth of intra-EC FDI is linked to the adoption of a pan-European FDI strategy by EC firms, largely prompted by EC market integration.

Foreign Investment in Developing Countries

Foreign Investment in Developing Countries. Edited by H. S. Kehal. Hampshire and New York: Palgrave Macmillan, 2004. Pp. 261. This book is an edited volume consisting of twelve diverse chapters that focuses on the theoretical, empirical, and policy issues of attracting foreign direct investment (FDI) in developing countries. While the first two chapters focus more on the theoretical aspects of FDI and its determinants, the remaining chapters are more empirical in focus and constitute country studies on the determinants of FDI or the impact of FDI on their economies. Some of these studies focus on the experience of the ASEAN countries. Among the empirical studies, Chapters 3 and 4 focus on China, which attracted the largest share of world FDI among the developing countries. These two chapters address two very interesting questions: (1) the impact of inward FDI on the Chinese economy and its determinants; and (2) how to maximize benefits from FDI and minimize the risks associated with it, and the lessons that can be learnt from China's experience. The analysis holds important implications for other developing countries that are too much FDI-dependent for their growth prospects and need to strike a balance between technology transfers and domestic market protection. The next two chapters involve studies on the Indian economy, which is emerging as a favourable investment destination, after a decade of economic reforms that has integrated it further with the global economy. Chapter 5 does not specifically focus on FDI but analyses the ways to enhance foreign investment flows in a broader sense. Chapter 6 specifically deals with FDI and the resource gap in India. It argues that FDI has not played a significant role in enhancing the profitability and efficiency of Indian firms even after a decade, and identifies the important constraints that deter the flows of FDI into India, including the policy environment for investment. This chapter comes out with a very interesting fact that after liberalization of the economy, Indian FDI and non-FDI companies seem to be competing against each other via larger advertisement expenditure than R&D expenditure or selling commission, indicating that unlike China, most of the FDI in India appears to be market oriented, with little focus on R&D. Chapters 7 and 8 then undertake empirical studies on ASEAN economies, viz. Indonesia and Malaysia, with the former specifically focusing on bilateral FDI flows from the EU. These two chapters undertake an econometric exercise of the determinants of FDI flows in each of them, and observe that while these countries have been generally successful in attracting FDI for their growth prospects, they face increasing competition from other developing countries, and need to undertake important policy changes to continue to be competitive in attracting global FDI. Chapter 9 by Sadhana Srivastava and Ramkishen S. Rajan, by far the longest and one of the most interesting chapters of this book, makes an important contribution to the policy discussion on the impact of China's economic rise on trade and FDI flows in ASEAN and India. …

Developing Countries' Attractiveness for Foreign Direct Investment - Debt Overhang and Sovereign Risk as Major Impediments?

With declining debt inflows, foreign direct investment (FDI) has again become one of the major pillars of private financial flows to developing countries (Des). This has created some expectation to replace private bank olending by FDI. However, many heavily indebted countries may not only be constrained in terms of new private lending, but also in terms of FDI inflows. In order to overcome constraints in the supply of FDI, the determinants of FDI flows have to be identified in the first place. This has been done by the Kiel Institute of World Economics in a comprehensive study commissioned by the World Bank. The present paper summarizes some of the major results for details, see Agarwal et aZ. (1991). The focus is on the impact of sovereign risk on FDI and on possible disincentives for FDI arising from a debt overhang, i.e. on those aspects that reflect the most important recent changes in international capital market conditions. The empirical analysis concentrates on the 1980s. Regressions are run for an overall sample of about 35 host Des and for various subgroups. The paper is organized as follows. Section II presents the major hypotheses. The empirical results are summarized in Sections III and IV. Finally, some policy conclusions are drawn in Section V.