Determinants Of Inward Foreign Direct Investment Research Articles

The determinants of inward FDI in India in the 2000s

Purpose Unlike the traditional growth model of emerging markets after economic liberalization, India’s inward foreign direct investment (FDI) surged paralleling its strong economic growth in the 2000s, despite the failure to establish a strong secondary sector. This creates an opportunity to deepen the conceptual and contextual understanding of the pivotal mechanisms that impel foreign multinational enterprises to invest into India and provides a natural setting to better understand the nature of its institutional, political and economic environment. Design/methodology/approach The authors develop a theory contextualized to Indian inward FDI patterns for the 2000–2017 period. The theoretical framework expands upon received investment motives, with explicit consideration given to the idiosyncrasies of developments in India’s recent macro and socioeconomic environment. The authors test the hypotheses using panel data from 134 countries that invested in India, using a Hausman–Taylor estimation. Findings The authors find that India’s transition toward a knowledge economy attracts asset augmenting rather than asset exploiting FDI. Investors appear to target long-term investments by gaining access to India’s digital capabilities, R&D, and growing talent base with a high degree of specialization within analytics, biotechnology, engineering, or pharmaceuticals. Foreign investors do not seem to be notably deterred by infrastructural challenges nor by legal and regulatory restrictions. Originality/value By providing a new perspective on India’s atheoretical economic development and FDI environment, this study offers a distinct point of comparison with regard to established hypotheses within the extant literature on FDI into emerging markets. Rethinking contemporary investment motive theory by introducing an adapted conceptual framework provides further opportunity to inform the understanding of firm strategies in similar environments.

The political determinants of inward FDI

The popularity of Foreign Direct Investment (FDI) stimulates research on its determinants. This paper highlights the importance of political determinants in explaining inward FDI variation across countries. Adopting the argument that no single theory exists for FDI, it identifies the political factors based on the results of related empirical studies. The literature review?s primary concern is to provide underpinnings for further research on inward FDI distribution in the contemporary international political scene. It sets up the theoretical links between political regimes, political determinants, and FDI. The paper focuses on the importance of specific political variables established in all political systems to influence foreign investors' decision-making process. The distinguished determinants are property rights protection, the signing of Bilateral Investment Treaties (BITs), human rights, and quality of governance.

The Impact of the Technological Capability of a Host Country on Inward FDI in OECD Countries: The Moderating Roles of Institutional Quality

This empirical study explores the impacts of technological capability on inward foreign direct investment (FDI) with the moderations of institutional quality. We extend the existing literature by contributing the dynamic links between technology trade and institutional quality by using the panel data of 35 Organization for Economic Cooperation and Development (OECD) countries between 2000 and 2015. Based on fixed-effects regression, our results show that there is a U-shape relationship between the net technological capability of a host country and inward FDI. In addition, the institutional quality of a host country, government size and regulation have positive moderations, whereas sound money accessibility and legal system and property protection have negative moderations on the main U-shape relationship. Our study contributes to the literature on the determinants of inward FDI in the context of technological capabilities and institutional quality.

Determinants of inward FDI in Ukraine: Does political stability matter?

AbstractThe main goal of this article is to study the determinants of foreign direct investment (FDI) in Ukraine from 2013 to 2017 that includes the years of armed conflict. We adopt the Knowledge-Capital model as our analytical framework and extend it to include the effects that account for political stability and political regime. The research hypotheses obtained from this framework are verified using the Pseudo-Poisson Maximum Likelihood estimation technique and the bilateral panel data on direct investment stocks from 140 partner countries. Our empirical findings show that access to Ukraine's cheap labor force is the primary reason for inward FDI. Moreover, we find no direct relationship between the political events in Ukraine and the investment stock dynamics as the estimated parameters on the indices of democracy, autocracy, polity, and political stability show no statistical significance.

Revisiting the location of FDI in China: A panel data approach with heterogeneous shocks

Foreign Direct Investment (FDI) is viewed as a primary driving force in shaping the global economy and receives particular attention in empirical studies. In this paper, we argue that many of the existing studies ignore endogeneities that arise from shocks in source and destination countries. To address this endogeneity issue, we take the “controlling through estimating” idea from the econometric literature and propose using panel data models with heterogeneous shocks to deal with it. We consider the quasi maximum likelihood (QML) method to estimate our proposed model. We investigate the asymptotic properties of the QML estimator, including the consistency, the asymptotic representation, and the limiting distribution. We also propose new statistics to test the validity of the use of traditional dynamic and static panel data estimation methods. Applying it to the location determinants of inward FDI in China, we find that the endogeneity issue does exist, and that controlling for heterogeneous shocks helps to improve the estimation results.

What determines foreign direct investment in Russia?

Abstract This article focuses on the determinants of inward foreign direct investment (FDI) in Russia. The article briefly describes the historical context of foreign investment policymaking in Russia since the beginning of the economic transition to an open market economy after the dissolution of the Soviet Union. When compared to other developing countries, Russia's FDI stocks continue to lag despite a set of proactive measures undertaken by the national government. Following the literature review, the most commonly cited determinants explaining inward FDI in Russia include market size, labour productivity, trade and investment barriers, domestic exchange rate, rule of law and institutional framework. This article aims to contribute empirically to the study of determinants of inward FDI in Russia. This article uses the Pseudo-Poisson Maximum Likelihood (PPML) estimation technique, the robustness of the PPML estimation is then verified using a standard autoregressive integrated moving average (ARIMA) model with the Durbin–Watson autocorrelation test. Our benchmark results suggest the efficiency-seeking motive of FDI over a market seeking and horizontal motive as a main reason for inward FDI in Russia. The ARIMA regression indicates the absence of statistical significance of economic openness and variables of labour productivity. Overall, the market size and tax rate variables have the most positive effects on the inward FDI, while barriers to trade and sanctions have the most negative effects. The results confirm that for transitional economies, integration into the world economy, proactive local development and tax cuts for outside investors remain to be critical when it comes to attracting FDI.

Determinants of foreign direct investment from EU-15 Countries in Poland

Abstract During the last two decades, Poland has become a large recipient of inward foreign direct investment (FDI). This article uses standard panel data techniques to study empirically the determinants of inward FDI in Poland during the period 1996–2015 made by multinational enterprises coming from the old European Union (EU)-15 member states. The estimated specification is derived from the knowledge-capital (KC) model and includes two types of capital: human and physical. The assembled empirical evidence points to the horizontal motive as the primary reason for undertaking FDI in Poland by multinational firms based in the old EU-15 member states. Moreover, the KC model does not seem to explain better the pattern of inward FDI in Poland compared to the standard ad hoc gravity model of international capital mobility.

Foreign direct investment in the G-20: to what extent do institutions matter?

PurposeThis study aims to identify to what extent the economic factor effect is more salient in shaping inward foreign direct investment (IFDI) than are institutional factors in G-20 inflow patterns.Design/methodology/approachTechnique for Order Preference by Similarity to Ideal Solution (TOPSIS) method was applied using the World Bank Governance and Development Indicators, followed by a panel data technique over the period 2005-2015 to estimate the connections between the different dimensions of economics, institutions and IFDI in the G-20.FindingsResults showed that countries with better economic performance contrasting with the governance indicators are more effective at attracting IFDI. However, the correlation between FDI intensity and governance indicators has been found relatively weak, which may suggest a more controversial role of institutions as determinants of IFDI.Research limitations/implicationsThis quantitative approach uses a country-level set of variables; therefore, the authors suggest the development of more firm-level analysis of the impact of institutions. Also, the limitation of the TOPSIS method itself is based on heuristic assumptions.Practical implicationsThe main findings point to a relatively low impact of institutions on IFDI. The authors suggest that the global financial crisis has changed the rationale of decision-making by multinational companies.Originality/valueThe originality of the present study was to apply a multi criteria decision-making technique on FDI’s analysis combined with institutional data.

The Determinants of Inward FDI in Selected ServiceS Industries in MalaysiA

In its drive to achieve a high-income country status, Malaysia aspires to attract more private investment into the services sector. However, empirical studies on the determinants of foreign direct investment (FDI), especially in the services sector, are sparse, even more so at the industry level. The location theory asserts that FDI inflows into a host country are determined by variables related to resources, infrastructure, market conditions, cost and business environment. This paper investigates the validity of the location theory on Malaysia using a set of panel data for eight services industries from 2003 to 2010. We find that at the industry level, market size, ICT infrastructure and human capital have significantly influenced FDI inflows into the services sector. However, the impact of FDI liberalisation is not significant compared to the dynamic changes of the other variables as progress in FDI liberalization is slow and limited.

Determinants of Inward FDI in Mongolia: An Application of the ARDL Bounds Testing Approach to Cointegration

The study at hand is the first of its kind that aimed to provide a comprehensive analysis of the determinants of foreign direct investment (FDI) in Mongolia by analyzing their short-run, long-run, and Granger causal relationships. In doing so, we methodically used a series of econometric methods to ensure reliable and robust estimation results that included the augmented Dickey-Fuller and Phillips-Perron unit root tests, the most recently advanced autoregressive distributed lag (ARDL) bounds testing approach to cointegration, fully modified ordinary least squares, and the Granger causality test within the vector error-correction model (VECM) framework. Our findings revealed domestic market size and human capital to have a U-shaped relationship with FDI inflows, with an initial positive impact on FDI in the short-run, which then turns negative in the long-run. Macroeconomic instability was found to deter FDI inflows in the long-run. In terms of the impact of trade on FDI, imports were found to have a complementary relationship with FDI; while exports and FDI were found to be substitutes in the short-run. Financial development was also found to induce a deterring effect on FDI inflows in both the short- and long-run; thereby also revealing a substitutive relationship between the two. Infrastructure level was not found to have a significant impact on FDI on any conventional level, in either the short- or long-run. Furthermore, the results have exhibited significant Granger causal relationships between the variables; thereby, ultimately stressing the significance of policy choice in not only attracting FDI inflows, but also in translating their positive spill-over benefits into long-run economic growth.

Determinants of inward FDI in manufacturing: a cross-sectoral analysis for Greece

This paper examines the sectoral patterns and determinants of inward foreign direct investment (FDI) in Greek manufacturing. The panel-econometric analysis across manufacturing sectors reveals that, in contrast with low labour costs, a sector's size, labour productivity, scale economies and R&D intensity do significantly affect the attraction of FDI across manufacturing industries. Additionally, the empirical findings imply that policy measures which strengthen the natural resources-based advantages, promote industrial clusters and export processing zones, as well as upgrade the export-oriented logistics and outsourcing activities, would be expected to raise the inflow of manufacturing FDI in the country.

Examining the determinants of inward FDI: Evidence from Norway

This paper examines the impact of macroeconomic factors on foreign direct investment (FDI) inflows in Norway under the location-specific advantage. Using cointegrating regressions with Fully Modified OLS (FMOLS) and the vector autoregressive and error correction model (VAR/VECM) on quarterly data, the study finds that the real GDP, sector GDP, exchange rate and trade openness have a positive and significant impact on FDI inflows. However, money supply, inflation, unemployment and interest rate produced significantly negative results. The results imply that in seeking to promote a dynamic competitive advantage in the home country, governments need to pay more attention to their macroeconomic policies to help fashion and reduce production and transaction costs of MNEs.

An analysis of net FDI drivers in BRIC countries

Purpose – The purpose of this study is to identify the main drivers which can explain the relative success of BRIC countries (i.e. Brazil, Russia, India and China), collectively and individually, in attracting foreign direct investment (FDIs). Unlike previous studies that have identified gross domestic product (GDP) as a major determinant, we find that for the sampling period 1980-2008, social variables (namely, high population growth and educated labor) and political variables account for 40 and 7 per cent of the variance in net inward FDI, respectively, and no importance for economic variables. Interestingly, for a sub-period (1999-2008), we observe the salience of financial (namely, sizable GDP economy, favorable net trade balance and controlled currency risk and sovereign debt risk) determinants of inward FDI (R2 is 44 per cent). On the other hand, when testing individual countries, it seems that FDI determinants are not universal as each country enjoys different characteristics and sources of strengt...

The location of inward investment, technical change and skilled labour: Evidence from the United States

This study provides an empirical analysis of US inward foreign direct investment (FDI) with particular reference to the role of skilled labour. The theoretical foundations of the analysis are rooted in OLI theory and, in particular, its locational aspects. However, the empirical techniques employed are e more commonly associated with factor proportions theory. Thus, the contribution of the paper is partly methodological in applying such techniques to the determinants of inward FDI. The paper also produces evidence that US inward FDI is focused on skill intensive economic activities, using multiple categories of skilled labour. It also finds that strategic asset seeking behaviour focused on skilled labour overlaps with efficiency seeking behaviour linked to productivity change, export activity and market seeking behaviour.

FDI Flows to Latin America, East and Southeast Asia, and China: Substitutes or Complements?

AbstractIs China diverting foreign direct investment (FDI) from other developing countries? Theoretically, a growing China augments other countries' FDI by creating more production networking and raising demand for resources. However, low Chinese costs lure multinationals away from other production sites. Here we explore this issue empirically. We focus on East and Southeast Asia and Latin America for 1985–2002. We control for the standard determinants of inward FDI, then add China FDI to represent the “China Effect.” We found that China's FDI is positively related to FDI in Asia, while the China Effect is insignificant for Latin America. Also the China Effect is generally not the most important determinant of other countries' FDI. Market sizes and policies such as corporate tax rates and openness tend to be more important.

The Giant Sucking Sound: Is China Diverting Foreign Direct Investment from Other Asian Economies?

This paper attempts to determine empirically whether China is taking foreign direct investment (FDI) away from other Asian economies (the “China effect”). A random-effects simultaneous equation model, controlling for the determinants of inward FDI of eight East and Southeast Asian economies over 1985–2001 and using China's inward FDI as an indicator of the China effect, indicates that China's FDI level is positively related to these economies' FDI levels and negatively related to their shares in FDI in Asia. Moreover, openness, corporate tax rates, and corruption can exert a greater influence on these countries' FDI than China's FDI.