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What Determines Foreign Direct Investment? An Empirical Investigation


  • Felipe Larrain


Foreign Direct Investment has become an important source of long-term capital inflows for less developed countries in the last two decades. As documented in previous literature, FDI flows may increase permanently domestic output and represent an important source of technological spillovers for national firms. This linkage makes the FDI attraction research as well as the study of its determinants an important subject for policy makers. This paper studies FDI determinants on both a theoretical and an empirical level: a theoretical model of monopolistic competition is presented, from which testable hypothesis on the determinants of FDI are studied through a panel data for a large group of countries between the years 1980 and 2000. Although the estimated econometric models are simple, we find that they can satisfactorily explain both static distribution of FDI flows across countries as well as through time, leaving less than 20% of variation in the dependent variable unexplained. By using political and institutional explanatory variables, we are also able to explain which policy factors seem to attract more FDI

Suggested Citation

  • Felipe Larrain, 2004. "What Determines Foreign Direct Investment? An Empirical Investigation," Econometric Society 2004 Latin American Meetings 347, Econometric Society.
  • Handle: RePEc:ecm:latm04:347

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    More about this item


    FDI; incentive policies; panel data; rule of law; regulatory burden;

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation


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