FDI determinants: dynamic extreme bounds analysis

Abstract

PurposeThe aim of this paper is to develop a new analysis method, named dynamic extreme bounds analysis (DEBA), and to determine decisive determinants of foreign direct investment (FDI) by using this new method.Design/methodology/approachIn econometrics, the extreme bounds analysis (EBA) method is a convincing way of examining the strength of independent variables. However, the results obtained when using the EBA method contain little information, since each variable is only either strong or fragile, and some strong variables may be omitted because their significance could be undermined by just one unreasonable regression. Therefore, in order to overcome these limitations, this paper proposes DEBA, a new analysis method.FindingsThe authors employ the DEBA method to determine the factors which impact FDI in 86 countries. The authors note that in developing countries, the level of previous FDI, a high degree of openness, large market size and development of infrastructure help to attract FDI, whereas the development of domestic industry deters it. In developed countries, FDI is lured by the level of previous FDI stock, a high degree of openness, large market size, macroeconomic instability and availability of energy.Research limitations/implicationsAlthough this study is expected to contribute a new methodological approach and define the strong determinants of FDI, the study is not without limitations, such as the unavailability of data. Further studies should improve the DEBA method by developing DEBA packages for use in popular statistical software, enhancing methods for other types of data and more accurately determining the estimation order of variables. In addition, further research should expand the study's FDI model, providing more potential variables for an in-depth overview of this model.Originality/valueThis study is to contribute a new methodological approach (DEBA method) for data analysis and defining of strong determinants of FDI. The study findings are useful for governments, policy-makers and economists in formulating more attractive FDI policies.

Impact of FDI inflows on bank loans in Gulf Cooperation Council economies: an empirical insight

“…In general, most of the previous studies which have focused on analyzing the association between FDI and macroeconomic factors have found that FDI significantly influences the economic activities in both developed and emerging market economies (Bhasin and Kapoor, 2020; Pham and Wongsurawat, 2020; Coussi et al , 2018; Wang and Li, 2018; Park and Roh, 2019). Over the years, foreign investment has grown significantly in several developing economies and has become a key constituent of the local system.…”

More than just investment: Causality analysis between foreign direct investment and economic growth

“…In addition, some country-specific studies have identified potential determinants of FDI such as trade openness [ 76 – 80 ] market sizes [ 77 – 81 ], labour costs, human capital [ 77 , 80 ], infrastructure availability [ 77 , 79 , 80 ], industry value added, government consumption, telephone mainlines per 100 of population, financial development, service value-added, inflation and commercial energy use per capita. Moreover, expected years of schooling, political stability [ 76 ], exchange rates, tax rates, tax depreciation, tax holidays, trade barriers, gross domestic investment, gross capital formation, technology gap, economic freedom, research and development, and corruption [ 77 ] are considered.…”

“…In addition, some country-specific studies have identified potential determinants of FDI such as trade openness [ 76 – 80 ] market sizes [ 77 – 81 ], labour costs, human capital [ 77 , 80 ], infrastructure availability [ 77 , 79 , 80 ], industry value added, government consumption, telephone mainlines per 100 of population, financial development, service value-added, inflation and commercial energy use per capita. Moreover, expected years of schooling, political stability [ 76 ], exchange rates, tax rates, tax depreciation, tax holidays, trade barriers, gross domestic investment, gross capital formation, technology gap, economic freedom, research and development, and corruption [ 77 ] are considered. Further, these factors are considered key determinants: economic risk rating, financial risk rating, political risk rating, commodity price index, world stock market index, gross fixed capital formation [ 78 ], GDP growth, macro-economic stability, school enrollment rate [ 79 ], growth prospects and positive country conditions, government finance, rate of return on investment, policy measures [ 79 ], economic potential, labour market characteristics, technological progress, labour regulation, competitiveness and eligibility for Cohesion Fund [ 81 ].…”