Economic, social and institutional determinants of FDI inflows: A comparative analysis of developed and developing economies

Abstract

This paper investigates the determinants of Foreign Direct Investment (FDI) inflows by classifying determinants into economic, social, and institutional categories, and examines its linkage between FDI in developed and developing economies at an aggregate level. Countries are distinguished in accordance with country income level, and each category is constructed as a composite index by utilizing the Principal Component Analysis (PCA) method. Using annual data from 1996 to 2019 and panel data approaches, the determinants of FDI are investigated for 178 countries. Main findings are, first, developing economies are largely dependent on economic indicators to attract FDI. Second, in the case of developed economies, the role of social indicators on FDI inflows is shown relatively more significant than economic indicators. Finally, the linkage between institutional indicators and FDI inflows is weak and statistically insignificant in both developed and developing economies.

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