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Identifying the robust economic, geographical and political determinants of FDI: An extreme bounds analysis

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Understanding what determines Foreign Direct Investment (FDI) inflows remains a primary concern of economists and policy makers; yet, the uncertainty surrounding FDI theories and empirical approaches has created much ambiguity regarding the determinants of FDI. This paper undertakes an exhaustive search for robust determinants of FDI. We apply Extreme Bound Analysis to deal with model uncertainty, using a large panel data set that covers 168 countries from 1970 to 2006. We consider 58 potential determinants of FDI that include economic, geographic and political variables. We show that more than half of the previously suggested FDI determinants are not robust. Our findings reaffirm the view that, in order to become attractive destinations for foreign investors, countries need to reinforce their infrastructure facilities, liberalise their local and global investment policies, improve the quality of governance institutions and reduce internal conflict and political risk.

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  • Chanegriha, Melisa & Stewart, Chris & Tsoukis, Chris, 2014. "Identifying the robust economic, geographical and political determinants of FDI: An extreme bounds analysis," Economics Discussion Papers 2014-4, School of Economics, Kingston University London.
  • Handle: RePEc:ris:kngedp:2014_004
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    Keywords

    Foreign direct investment; Extreme Bounds Analysis; panel data; economic geographic and political determinants.;

    JEL classification:

    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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