Determinants of Foreign Direct Investment: A Sectoral and Institutional Approach

28 Pages Posted: 24 Aug 2010

See all articles by James P. Walsh

James P. Walsh

International Monetary Fund (IMF)

Jiangyan Yu

International Monetary Fund (IMF)

Date Written: July 2010

Abstract

Using a dataset which breaks down FDI flows into primary, secondary and tertiary sector investments and a GMM dynamic approach to address concerns about endogeneity, the paper analyzes various macroeconomic, developmental, and institutional/qualitative determinants of FDI in a sample of emerging market and developed economies. While FDI flows into the primary sector show little dependence on any of these variables, secondary and tertiary sector investments are affected in different ways by countries’ income levels and exchange rate valuation, as well as development indicators such as financial depth and school enrollment, and institutional factors such as judicial independence and labor market flexibility. Finally, we find that the effect of these factors often differs between advanced and emerging economies.

Keywords: Foreign direct investment, Developing countries, Economic models, Emerging markets, Gross domestic product

Suggested Citation

Walsh, James P. and Yu, Jiangyan, Determinants of Foreign Direct Investment: A Sectoral and Institutional Approach (July 2010). IMF Working Papers, Vol. , pp. 1-27, 2010. Available at SSRN: https://ssrn.com/abstract=1662260

James P. Walsh (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Jiangyan Yu

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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