Foreign Direct Investment and factors affecting it
59
Pakistan Economic and Social Review
Volume XLI, No. 1&2 (2003), pp. 59-75
ANALYSIS OF FACTORS AFFECTING
FOREIGN DIRECT INVESTMENT
IN DEVELOPING COUNTRIES
BUSHRA YASMIN, AAMRAH HUSSAIN and MUHAMMAD ALI CHAUDHARY*
Abstract. This study has analyzed the volume and determinants of Foreign Direct
Investment (FDI) in developing countries of the world. The analysis was based on a sample of 15 developing countries with 5 each from upper middle, lower middle and lower income countries. In general, the flow of FDI to developing countries has followed an uneven path and its volume was modest in the beginning of
1980s but has tended to rise in subsequent years. Following panel data model, we applied three approaches, namely common intercept model, random effects and fixed effects model, to clearly identify the factors affecting FDI in developing countries with different levels of income. The analysis showed that urbanization,
GDP per capita, standard of living, inflation, current account and wages are affecting FDI significantly in low income, urbanization, labour force, domestic investment, trade openness, standard of living, current account, external debt and wages in lower middle income and urbanization, labour force, GDP per capita, domestic investment, trade openness and external debt in the sample upper middle income countries. Similarly, country specific dummies have attributed large variations in FDI to institutional and structural differences among the countries analyzed.
I. INTRODUCTION
Foreign Direct Investment (FDI) has historically contributed to the development of many host countries by way of improving their infrastructure, technical skills, entrepreneur abilities and financial resources in terms of government revenue and foreign exchange. Since FDI is expected
*The authors are Lecturer in Economics and a graduate student at Fatima Jinnah Women
University, Rawalpindi (Pakistan), and Professor of Economics, respectively.
Pakistan Economic and Social Review
Volume XLI, No. 1&2 (2003), pp. 59-75
ANALYSIS OF FACTORS AFFECTING
FOREIGN DIRECT INVESTMENT
IN DEVELOPING COUNTRIES
BUSHRA YASMIN, AAMRAH HUSSAIN and MUHAMMAD ALI CHAUDHARY*
Abstract. This study has analyzed the volume and determinants of Foreign Direct
Investment (FDI) in developing countries of the world. The analysis was based on a sample of 15 developing countries with 5 each from upper middle, lower middle and lower income countries. In general, the flow of FDI to developing countries has followed an uneven path and its volume was modest in the beginning of
1980s but has tended to rise in subsequent years. Following panel data model, we applied three approaches, namely common intercept model, random effects and fixed effects model, to clearly identify the factors affecting FDI in developing countries with different levels of income. The analysis showed that urbanization,
GDP per capita, standard of living, inflation, current account and wages are affecting FDI significantly in low income, urbanization, labour force, domestic investment, trade openness, standard of living, current account, external debt and wages in lower middle income and urbanization, labour force, GDP per capita, domestic investment, trade openness and external debt in the sample upper middle income countries. Similarly, country specific dummies have attributed large variations in FDI to institutional and structural differences among the countries analyzed.
I. INTRODUCTION
Foreign Direct Investment (FDI) has historically contributed to the development of many host countries by way of improving their infrastructure, technical skills, entrepreneur abilities and financial resources in terms of government revenue and foreign exchange. Since FDI is expected
*The authors are Lecturer in Economics and a graduate student at Fatima Jinnah Women
University, Rawalpindi (Pakistan), and Professor of Economics, respectively.
References: YASMIN et al.: Analysis of Factors Affecting FDI in Developing Countries 75