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ANALYSIS OF FACTORS AFFECTING FOREIGN DIRECT INVESTMENT IN DEVELOPING COUNTRIES

BUSHRA YASMIN, AAMRAH HUSSAIN and MUHAMMAD ALI CHAUDHARY
Pakistan Economic and Social Review
Vol. 41, No. 1/2 (2003), pp. 59-75
Stable URL: http://www.jstor.org/stable/25825245
Page Count: 17
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ANALYSIS OF FACTORS AFFECTING FOREIGN DIRECT INVESTMENT IN DEVELOPING COUNTRIES
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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.

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