Foreign Direct Investment and Its Drivers: an Empirical Comparative Study on Developed and Developing Countries

Abstract

Foreign Direct Investment plays an important role in a country’s economic activity because of its positive effect on economic growth. In developing or transition countries foreign capital is considered one of the most important sources of economic growth, helping in creating new jobs and influencing technological innovation. Many governments design and implement strategies to attract Foreign Direct Investment over time. Therefore, determining the role of Foreign Direct Investment in different economies has become an important issue for designing policy responses. This paper aims to determine through empirical analysis, the determinants of Foreign Direct Investment flows in developing and developed countries and make policy recommendations for the promotion of Foreign Direct Investment in these countries. Based on the selected data period collected by the World Bank repository, we applied pooled regression models and panel data analyses to determine the factors influencing FDIs. Applying the fixed effect model and the random one, we identified the important factors impacting the FDI for developing and developed countries. Based on the results obtained by applying the random-effects model, among effective factors on Foreign Direct Investment inflows, we could mention Gross Domestic Product (GDP) growth, Official Development Assistance, Trade, inflation, regulatory quality, government effectiveness, political stability, and population. From all these factors, only inflation tends to decrease the Foreign Direct Investment inflows in a hosting country, and hence, governments in developing countries must give more attention to these factors.