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Determinants of foreign direct investment in developing countries: a panel data study

Author

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  • Reenu Kumari
  • Anil Kumar Sharma

Abstract

Purpose - The purpose of this paper is to identify key determinants of foreign direct investment (FDI) inflows in developing countries by using unbalanced panel data set pertaining to the years 1990-2012. This study considers 20 developing countries from the whole of South, East and South-East Asia. Design/methodology/approach - Using seven explanatory variables (market size, trade openness, infrastructure, inflation, interest rate, research and development and human capital), the authors have tried to find the best fit model from the two models considered (fixed effect model and random effect model) with the help of Hausman test. Findings - Fixed effect estimation indicates that market size, trade openness, interest rate and human capital yield significant coefficients in relation to FDI inflow for the panel of developing countries under study. The findings reveal that market size is the most significant determinant of FDI inflow. Research limitations/implications - Like any other study, this work also has some limitations. Lack of data on key determinants such as labor cost, exchange rate, corruption, natural resources, effectiveness of rule of law and political risk may be considered one such limitation. Further, controlling for variables such as exchange rate, corruption, labor cost and political risk could make significant improvements to this study. Practical implications - This study has significant implications for policy makers, mangers and investors. Policy makers would be able to understand the importance of the major determinants of FDI mentioned in the paper, and take steps to formulate policies that encourage FDI. Such measures could include developing market size, making regulations more international trade friendly and investing in the nation’s human capital. Further, steps could be taken to keep interest rates and inflation rates under control as these factors have been found to influence FDI. Originality/value - The sample of 20 developing nations chosen for this study has not been considered by any study earlier. This is a unique contribution to existing body of research, and highlights the originality value of this paper.

Suggested Citation

  • Reenu Kumari & Anil Kumar Sharma, 2017. "Determinants of foreign direct investment in developing countries: a panel data study," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 12(4), pages 658-682, September.
    • Handle: RePEc:eme:ijoemp:ijoem-10-2014-0169
    DOI: 10.1108/IJoEM-10-2014-0169
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    Citations

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    Cited by:

    1. Umer Jeelanie Banday & Ranjan Aneja, 2024. "Macroeconomic Stability, Openness, and Economic Growth Nexus: an Insight from BRICS Countries," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 5965-5979, June.
    2. Reenu Kumari & Sunil Kumar Singh, 2024. "Impact of ICT Infrastructure, Financial Development, and Trade Openness on Economic Growth: New Evidence from Low- and High-Income Countries," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 7069-7098, June.
    3. Yeboah Evans, 2024. "The relationship between foreign direct investment and trade openness: Evidence from six developed economies," Economic and Regional Studies / Studia Ekonomiczne i Regionalne, Sciendo, vol. 17(2), pages 222-250.
    4. O.J. Ojeka & F.C. Odey & D.Y. Adebayo & G. Amodu, 2023. "Finance and economic development in sub-Saharan Africa: Does foreign direct investment matter?," Journal of Economic Policy and Management Issues, JEPMI, vol. 2(1), pages 40-58.
    5. Chibalamula, Haggai Chibale & Evans, Yeboah & Kachelo, Mukuka & Bamwesigye, Dastan, 2023. "The Effect of Foreign Direct Investment and Trade Openness on Economic Growth: Evidence from Five African Countries," AGRIS on-line Papers in Economics and Informatics, Czech University of Life Sciences Prague, Faculty of Economics and Management, vol. 15(1), January.
    6. Fakhri Fuad Murshudli, 2023. "Green Banking for Sustainable Development," Foresight and STI Governance (Foresight-Russia till No. 3/2015), National Research University Higher School of Economics, vol. 17(2), pages 82-94.
    7. Mohammad Shaiful Islam & Ahmed Beloucif, 2024. "Determinants of Foreign Direct Investment: A Systematic Review of the Empirical Studies," Foreign Trade Review, , vol. 59(2), pages 309-337, May.
    8. Caetano, Rafaela Vital & Marques, António Cardoso & Afonso, Tiago Lopes & Vieira, Isabel, 2023. "Could Private Investment in Energy Infrastructure soften the environmental impacts of Foreign Direct Investment? An assessment of developing countries," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 961-977.
    9. Yingying Zhang Zhang & Sitaula Deepika & Henry (Hemin) Song, 2023. "International Technology Transfer in Emerging Markets: A Case of Nepal," Working Papers EMS_2023_06, Research Institute, International University of Japan.
    10. Dagar, Vishal & Dagher, Leila & Rao, Amar & Doytch, Nadia & Kagzi, Muneza, 2024. "Economic policy uncertainty: Global energy security with diversification," Economic Analysis and Policy, Elsevier, vol. 82(C), pages 248-263.

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