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An Analysis of Host Country Characteristics that Determine FDI in Developing Countries: Recent Panel Data Evidence

Author

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  • Muhammad Tariq Majeed

    () (Department of Economics, Quaid-i-Azam University, Islamabad.)

  • Eatzaz Ahmad

    () (Department of Economics, Quaid-i-Azam University, Islamabad.)

Abstract

This paper analyzes a range of host country characteristics that determine foreign direct investment (FDI) flows to developing countries, using panel data on 72 countries for the period 1970-2008. Keeping in view the endogeneity problem of the chosen host country’s characteristics, the model is estimated using the General Method of Moments (GMM) technique. The analysis shows that gross domestic product (GDP), economic growth, and per capita income positively affect FDI—a result consistent with the market-seeking behavior of multinational corporations (MNCs). Furthermore, we find that remittances have a significant and positive impact on FDI. On the other hand, inflation and the balance of payments deficit have negative effects on FDI. MNCs are attracted to host countries that are outward looking and follow trade-promoting policies. This is confirmed by the positive effect of openness on FDI flows to developing countries. The study also finds that the effect of military expenditures on FDI is negative and significant. Finally, our analysis finds that the real exchange rate has a significantly negative impact on FDI.

Suggested Citation

  • Muhammad Tariq Majeed & Eatzaz Ahmad, 2009. "An Analysis of Host Country Characteristics that Determine FDI in Developing Countries: Recent Panel Data Evidence," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 14(2), pages 71-96, Jul-Dec.
  • Handle: RePEc:lje:journl:v:14:y:2009:i:2:p:71-96
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Majeed, M Tariq, 2011. "Trade, Poverty and Employment: Empirical Evidence from Pakistan," MPRA Paper 45077, University Library of Munich, Germany.
    2. repec:pje:journl:article15sumii is not listed on IDEAS
    3. Ramírez-Alesón, Marisa & Fleta-Asín, Jorge, 2016. "Is the Importance of Location Factors Different Depending on the Degree of Development of the Country?," Journal of International Management, Elsevier, vol. 22(1), pages 29-43.
    4. repec:bla:rdevec:v:21:y:2017:i:3:p:527-542 is not listed on IDEAS

    More about this item

    Keywords

    Investment; panel data; developing countries; FDI; GMM.;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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