Foreign Direct Investment Determinants in OECD and Developing Countries

• Author: Christis Hassapis,Nikolaos Philippas,Fotini Economou,Mike Tsionas
• Date: 01 August 2017
• DOI: http://doi.org/10.1111/rode.12269
• Published date: 01 August 2017

Foreign Direct Investment Determinants in OECD

and Developing Countries

Fotini Economou, Christis Hassapis, Nikolaos Philippas, and

Mike Tsionas*

Abstract

In this paper we examine the foreign direct investment (FDI) inflow determinants in 24 Organisation for

Economic Co-operation and Development (OECD) and 22 developing (non-OECD) countries over

1980–2012, using the standard fixed effects as well as a dynamic panel approach. The most robust finding

is that lagged FDI, market size, gross capital formation and corporate taxation significantly affect FDI

inflows in OECD countries. We also examine a group of developing countries, taking into consideration

the increased share of world FDI inflows that developing countries have attracted, and compare the

results. In this case, lagged FDI, market size, labor cost and institutional variables provide the most

robust results. The empirical results have important policy implications indicating the factors that host

economies should emphasize in order to attract FDI inflows.

1. Introduction

Foreign direct investment (FDI) has attracted research interest because of its

potential positive economic impact on the host countries’ economies. Even though

there is no agreement regarding growth benefits, several studies have emphasized

the positive impact of FDI on economic growth through employment, acquired

knowledge and management skills, as well as technology spillovers (Campos and

Kinoshita, 2002; Kim et al., 2003; Johnson, 2006; Busse and Groizard, 2008; Krifa-

Schneider and Matei, 2010; Walsh and Yu, 2010; Alfaro et al., 2010).

In the wake of the global financial crisis and several regional fiscal crises,

attracting FDI in order to foster economic activity has become a priority for many

countries facing financing and market liquidity problems. In fact, developing

economies have been attracting an increasing share of the world FDI inflows that

have witnessed an explosive increase, especially after 2003 (see Figure 1).

A growing strand of literature has been trying to determine FDI attractiveness

factors studying different country groups. Organisation for Economic Co-operation

and Development (OECD) countries usually attract research interest since

traditionally they have been representing an outstanding share of the world FDI

inflows, reaching on average almost 76% of the total FDI inflows for the period

1990–1999 and 70% for the period 2000–2009. Moreover, the increasing investing

interest in developing countries is also evident with an average share of world FDI

*Philippas (Corresponding author): Department of Business Administration, University of Piraeus, 80,

Karaoli and Dimitriou Street, 185 34, Piraeus, Greece. Tel: +30-4142168; E-mail: philipas@unipi.gr.

Economou: Centre of Planning and Economic Research, Athens, Greece. Hassapis: Department of

Economics, University of Cyprus, Nicosia, Cyprus. Tsionas: Lancaster University Management School,

LA1 4YX and Athens University of Economics and Business, Greece. The authors would like to thank

two anonymous referees as well as the participants of the 13th Annual EEFS Conference, Thessaloniki,

Greece, 12–15 June 2014, for their comments.

Review of Development Economics, 21(3), 527–542, 2017

DOI:10.1111/rode.12269

©2016 John Wiley & Sons Ltd

inflows of 31% for the period 1990–1999 and 32% for the period 2000–2009,

reaching almost 55% in 2012.

This paper extends the existing literature regarding FDI inflow determinants in

OECD and developing countries in several ways. First of all, previous studies

regarding OECD countries have examined only a small number of countries.

1

In

this study we extend previous research having a sample of 24 OECD countries.

Taking into consideration the increased share of world FDI inflows that developing

countries have attracted, we also examine a group of 22 developing (non-OECD)

countries. To this end we employ annual data for the period 1980–2012 using a

panel data approach. We examine a series of potential FDI determinants that

previous research has identified including market size, trade openness, labor cost,

school enrollment, corporate taxation and several institutional variables. Finally, we

compare the results of the individual country groups under examination, since

different factors may attract FDI in different countries. Our results provide robust

empirical evidence indicating lagged FDI, market size, corporate tax rates and gross

capital formation as important FDI determinants for the OECD countries. As far

as the developing countries are concerned lagged FDI, market size, labor cost, and

institutional variables provide the most robust results. The empirical results clearly

demonstrate that FDI determinants do not have the same effect across different

country groups and have important policy implications for the countries aiming to

attract FDI inflows in order to promote their economic growth. Our results also

indicate that the effect of trade openness, schooling and inflation is not robust for

any group or period under examination and therefore questionable. We consider

this result important for both future research as well as policy analysis.

The rest of the paper is structured as follows: section 2 presents a comprehensive

review of the relevant research; section 3 describes the data and the methodology

employed in order to examine the potential FDI determinants; section 4 reports the

empirical results; and, finally, section 5 concludes, providing useful insights

regarding the policy implications of the empirical results.

0

500000

1000000

1500000

2000000

2500000

1970

1972

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1980

1982

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2002

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2012

World Developing economies Developed economies

Figure 1. World FDI Inward Flows, (US$ millions ) (1970–2012) [Colour figure can

be viewed at wileyonlinelibrary.com]

Source: UNCTAD.

528 F. Economou, C. Hassapis, N. Philippas and M. Tsionas

©2016 John Wiley & Sons Ltd