the main part of FDI flows to East Asia, where China is the most favoured FDI destination
receiving more than 20 per cent of FDI going to developing countries.1 Africa, on the other
hand, received a small and declining share of FDI. If we adjust for the economic size of the
country and analyse FDI as a share of GDP, Figure 1 shows a more even distribution of
FDI although regional differences persist. While East Asia took off in the 1990s, recently
Africa has managed to attract further FDI inflows. Relative to its economic size, FDI
to Africa is now at comparable levels with East Asia and Latin America. South Asia
continues to be lagging behind. This paper sets out to analyse regional differences in FDI
between African, Asian and Latin American countries.2
First, it reviews the subset of FDI studies that have tackled the regional aspect of the
FDI decision by including regional dummies, by including interactions between regional
dummies and selected explanatory variables or by analysing FDI flows on a regional
basis. While the broad FDI literature has been reviewed quite frequently, this paper is
the first to focus on the regional aspect of FDI and to collect regional studies in a coherent
framework. This approach provides information about regularities in the driving forces of
FDI across regions and points out possible region-specific variables. The findings suggest
that regional dummies rarely turn out significant in elaborate models of FDI, that the
significance of interactions between regional dummies and FDI determinants suggests that
there is a large degree of heterogeneity between regions and, finally, that there seems to
be a pool of common FDI determinants but that region-specific characteristics should also
be taken into account.
Since the empirical studies reviewed in this paper vary widely in their sample selection,
estimation method, time horizon and set of explanatory variables the results are not
directly comparable, and it is therefore difficult to draw conclusions about why we observe
differences in the regional distribution of FDI. Since there is no consensus of a theoretical
framework for FDI, we let the data speak.
In the second part of the paper we apply a general-to specific analysis of the many FDI
determinants that have been applied in the existing literature. We do so both in a broad
cross-section of developing countries, where we also include regional dummy variables, and
on a region-by-region basis. Overall, 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, while other variables clearly turn
out to be region-specific. While African and Asian countries are largely heterogeneous
both with respect to the set of explanatory variables and their impact on FDI, Asian and
1In light of China’s outstanding role, some studies exclude China from the sample (see UNCTAD
(1994) and World Bank (1996) for further discussion). As an alternative, Jakobsen and Soysa (2006)
include a China dummy that turn out positive and highly significant.
2A large number of studies analyse the flow of FDI to Eastern European countries. These studies
are typically based on a gravity model specification of bilateral FDI flows and will not be reviewed here.
Also, studies of FDI to the Middle East and North African countries are too scarce to draw meaningful
comparisons.