Examining the Regional Aspect of Foreign Direct Investment to Developing Countries

explanatory variables suggests that regions are highly heterogeneous and that investors
perceive regions differently. And, third, regional studies suggest that there is a pool of
common FDI determinants whose impact varies across regions but also that region-specific
characteristics should be taken into account.

Since the empirical studies reviewed in this paper vary widely in their sample selec-
tion, estimation method, time horizon and set of explanatory variables the results are
not directly comparable. We therefore let the data speak and apply a general-to specific
analysis of the many determinants that have been applied in the existing FDI literature.
The results suggest that regional differences are not due to fixed regional effects. We find
that growth and inflation are robust and significant across regions although the size of
their impact varies. The impact from inflation seems stronger in Latin America than in
Asian and African countries. Also, economic growth has had a larger marginal effect in
Asian countries than in African and Latin American countries. While African and Asian
countries turn out to be largely heterogeneous both with respect to the set of explanatory
variables and their impact on FDI, Asian and Latin American countries can more readily
be pooled as long as proper interaction terms are specified. Finally, some variables appear
to be region-specific: GDP per capita, land area, roads, international reserves and govern-
ment expenditure for Africa; wage earnings, political rights and the Kaufmann voice and
accountability index for Asia; and telephone, external debt, corruption and ores export
for Latin America.

The findings in this paper suggest that foreign investors respond quite differently to
common determinants of FDI across regions and also that region-specific variables are
important to take into account when analysing FDI in a broad sample of developing
countries. However, this paper does not offer an explanation as to why this is so. One
interesting topic for future work could, for example, be to analyse FDI on a more disag-
gregated level to see if the observed regional heterogeneity can be explained by differences
in the sectoral distribution of FDI.

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