Understanding the determinants of FDI inflows through regression analysis

Abstract

This study explored the role of economic, institutional and political factors in attracting foreign direct investment (FDI) at a global level. Panel data of 123 countries for a period of twenty-nine years (1990-2018) in order to examine the significant determinants of FDI in a holistic approach. Analysis of the data has been done using fixed effect, random effect, and OLS estimators. Market Size, trade openness, natural resources endowment, lending rate, Purchasing Power Parity, urbanization, contribution of primary sector to GDP, Fisher open differential, Gross Capital Formation and interaction between these variables as the determinants of FDI inflows to a country. These factors were selected based on the relative importance they received in previous empirical literature. It was found that the lending rate, interaction term between lending rate, and the primary sector contribution to the GDP have a negative relationship with FDI inflow. On the other hand, real interest rate, Fisher open differential, natural resource endowment, and trade openness were found to encourage FDI inflow. Further, the expected growth of the economy came out to be insignificant, possibly because the size of the economy is captured by GCF already. The novelty of the study was that instead of focusing on a single country or a small group of countries, the authors have tried to compare the FDI inflow at a global level. Moreover, the existing studies have not taken the interaction terms among different variables into consideration.