An Analysis of Host Country Characteristics that Determine FDI in Developing Countries: Recent Panel Data Evidence
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.
Volume (Year): 14 (2009)
Issue (Month): 2 (Jul-Dec)
|Contact details of provider:|| Postal: |
Phone: (92-42) 6560939
Web page: http://www.lahoreschoolofeconomics.edu.pk/EconomicsJournal/LJEIntro.aspx
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Martin Feldstein & Charles Horioka, 1979.
"Domestic Savings and International Capital Flows,"
NBER Working Papers
0310, National Bureau of Economic Research, Inc.
- Carlton, Dennis W, 1983. "The Location and Employment Choices of New Firms: An Econometric Model with Discrete and Continuous Endogenous Variables," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 440-49, August.
- Cushman, David O, 1985. "Real Exchange Rate Risk, Expectations, and the Level of Direct Investment," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 297-308, May.
- Culem, Claudy G., 1988. "The locational determinants of direct investments among industrialized countries," European Economic Review, Elsevier, vol. 32(4), pages 885-904, April.
- Lall, Sanjaya, 1978. "Transnationals, Domestic Enterprises, and Industrial Structure in Host LDCs: A Survey," Oxford Economic Papers, Oxford University Press, vol. 30(2), pages 217-48, July.
- Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August.
- R Blundell & Steven Bond, .
"Initial conditions and moment restrictions in dynamic panel data model,"
W14&104., Economics Group, Nuffield College, University of Oxford.
- Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
- Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
- Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
- L.R. de Mello Jr., 1996.
"Foreign Direct Investment-Led Growth: Evidence from Time Series and Panel Data,"
Studies in Economics
9615, School of Economics, University of Kent.
- de Mello, Luiz R, Jr, 1999. "Foreign Direct Investment-Led Growth: Evidence from Time Series and Panel Data," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 133-51, January.
- Zhang, Kevin Honglin & Markusen, James R., 1999.
"Vertical multinationals and host-country characteristics,"
Journal of Development Economics,
Elsevier, vol. 59(2), pages 233-252, August.
- Kevin H. Zhang & James R. Markusen, 1997. "Vertical Multinationals and Host-Country Characteristics," NBER Working Papers 6203, National Bureau of Economic Research, Inc.
- Asiedu, Elizabeth, 2002. "On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different?," World Development, Elsevier, vol. 30(1), pages 107-119, January.
- Arellano, Manuel & Bond, Stephen, 1991.
"Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,"
Review of Economic Studies,
Wiley Blackwell, vol. 58(2), pages 277-97, April.
- Tom Doan, . "RATS program to replicate Arellano-Bond 1991 dynamic panel," Statistical Software Components RTZ00169, Boston College Department of Economics.
- Peter Nunnenkamp, 1991. "Developing Countries' Attractiveness for Foreign Direct Investment—Debt Overhang and Sovereign Risk as Major Impediments?," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 30(4), pages 1145-1158.
- M Arellano & O Bover, 1990.
"Another Look at the Instrumental Variable Estimation of Error-Components Models,"
CEP Discussion Papers
dp0007, Centre for Economic Performance, LSE.
- Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
- Khalid Sekkat & Marie-Ange Veganzones-Varoudakis, 2007.
"Openness, Investment Climate, and FDI in Developing Countries,"
Review of Development Economics,
Wiley Blackwell, vol. 11(4), pages 607-620, November.
- Marie-Ange Veganzones & K. Sekkat, 2007. "Openness, Investment Climate, and FDI in Developing Countries," Post-Print hal-00187094, HAL.
- Khalid Sekkat & Marie-Ange Veganzones, 2007. "Openness, investment climate and FDI in Developing countries," ULB Institutional Repository 2013/7370, ULB -- Universite Libre de Bruxelles.
- Yoong-Deok Jeon, 1992. "The determinants of Korean foreign direct investment in manufacturing industries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 128(3), pages 527-542, September.
- Lee, Jeong-Yeon & Mansfield, Edwin, 1996. "Intellectual Property Protection and U.S. Foreign Direct Investment," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 181-86, May.
- Bartik, Timothy J, 1985. "Business Location Decisions in the United States: Estimates of the Effects of Unionization, Taxes, and Other Characteristics of States," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(1), pages 14-22, January.
- Froot, Kenneth A & Stein, Jeremy C, 1991.
"Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach,"
The Quarterly Journal of Economics,
MIT Press, vol. 106(4), pages 1191-217, November.
- Kenneth A. Froot & Jeremy C. Stein, 1989. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," NBER Working Papers 2914, National Bureau of Economic Research, Inc.
- Root, Franklin R & Ahmed, Ahmed A, 1979. "Empirical Determinants of Manufacturing Direct Foreign Investment in Developing Countries," Economic Development and Cultural Change, University of Chicago Press, vol. 27(4), pages 751-67, July.
- Valerija Botrić & Lorena Škuflić, 2006. "Main Determinants of Foreign Direct Investment in the Southeast European Countries," Transition Studies Review, Springer, vol. 13(2), pages 359-377, 07.
- Erdal Demirhan & Mahmut Masca, 2008. "Determinants of foreign direct investment flows to developing countries: a cross-sectional analysis," Prague Economic Papers, University of Economics, Prague, vol. 2008(4), pages 356-369.
When requesting a correction, please mention this item's handle: RePEc:lje:journl:v:14:y:2009:i:2:p:71-96. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shahid Salahuddin)
If references are entirely missing, you can add them using this form.