potential, factor market characteristics, domestic market access, international openness
and geography) and (economic, political and commercial) risk. The overall picture arising
from these studies is very much in line with the findings in Section 3.2. While growth,
agglomeration and inflation are important in all regions, the impact of other FDI determi-
nants turns out to vary with regional location. Natural resource availability, infrastructure
and financial stability are important in Africa; labour costs and fiscal incentives in Asia;
and fiscal balance, exchange rate stability, financial stability and political instability in
Latin America.
Of the return variables listed in Table 3, the market potential proxies are the most
frequently used. The preferred variables are GDP, population size, GDP per capita and
GDP growth, which most often have a significant and positive effect on FDI.6 The results
also show strong agglomeration effects. The regions differ widely in their dependence on
various factors of production. While labour costs and labour availability are relatively
important in Asia, the relatively poor quality of the labour force has been an important
deterrent factor for FDI to African and Latin American countries. Also, natural resource
availability has been a driving force in Africa. Infrastructure turns out to be important
in most regions but most often so in Africa where landlocked and geographically isolated
countries face big problems in attracting foreign capital. Advancements in structural
reforms and privatisation have been important for the relative attractiveness of countries
in Latin America. Finally, trade openness (the most frequently used being total trade)
appears to be important in all regions except Asia.
From Table 4 it is clear that the risk of investing abroad has only received attention
recently probably due to the inability of traditional return determinants to explain the
regional distribution of FDI. The economic risk variables are the most frequently included
risk measures although their impact varies widely across regions. While high inflation
has been a deterrent factor in most regions, financial and political instability seems to
have scared away investors in African and Latin American countries. Asian countries,
on the other hand, appear to have benefited from a stable or even fixed exchange rate
regime. Interestingly, commercial risk is rarely accounted for in Asian and Latin American
countries. An accommodating investment climate and business environment (in particular
rule of law) as well as financial stability, on the other hand, have had a significant impact
on FDI in African countries.
6A few exceptions include Campos and Kinoshita (2008), Botric and Skuflic (2006), Ancharaz (2002)
and Nasser (2007) where GDP, population size or GDP per capita turn out to have a negative impact on
FDI. However, these papers also include growth as an explanatory variable in which case an explanation
might be that growth turns out to be the most important proxy for market potential whereas additional
market size proxies capture something else (for example, the level of development).