Examining the Regional Aspect of Foreign Direct Investment to Developing Countries

Examining the Regional Aspect of Foreign Direct
Investment to Developing Countries*

Eva Rytter Sunesent

Department of Economics, University of Copenhagen

Abstract

This paper applies a general-to-specific analysis to detect regularities in the
driving forces of foreign direct investment (FDI) that can explain why some regions
are more attractive to foreign investors than others. The results suggest that re-
gional differences in FDI inflows to African, Asian and Latin American countries
can be fully explained by structural characteristics rather than fixed regional effects.
The implication of this finding is that countries that are lagging behind other de-
veloping countries in attracting foreign capital have the opportunity to implement
policies aimed at improving the investment climate for foreign investors. This also
means that there is no African bias. Among a large number of return and risk
variables applied in the empirical literature, growth and inflation turn out to be
the only robust and significant FDI determinants across regions although the size
of their impact varies.

Keywords: Foreign direct investment, Africa, Asia, Latin America, general-to-
specific

JEL classifications: F21, 057

1 Introduction

During the last two decades, most developing countries have reformed their institutions,
improved their infrastructure and liberalised their regulatory framework in order to attract
foreign direct investments (FDI). However, Table 1 shows that FDI inflows in absolute
terms remain unevenly distributed among developing countries and regions. Asia proved
to be the biggest destination of FDI accounting for more than half of total FDI going to
developing countries, followed by Latin America that absorbed close to one third. In Asia,

*I am grateful for the valulable comments by Carl-Johan Dalgaard and Heino Bohn Nielsen.

^Department of Economics, University of Copenhagen. Studiestræde 6, 1455 Copenhagen K, Denmark.

E-mail address: [email protected].

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