Determinants of FDI: A Literature Review

Abstract

The increase of foreign direct investment (FDI) in recent decades has stimulated a great deal of research into the behaviour of multinational companies. A vast amount of empirical literature on FDI enumerates a long list of determinants that try to explain why multinational firms invest directly in a particular location, but it is seen that the results do not have any consensus. This paper offers a complete review of the theoretical approaches to and empirical work on determinants of FDI in an attempt to give out the most robust factors responsible for geographic distribution of FDI flows globally. The result catalogues some common determinants for developing and developed nations such as GDP, economic growth, per capita income, openness, and infrastructure. They had positive effect on FDI. Developed nations have focussed more on macro stability factors such as level and method of privatisation in the host country, country risk, and political risk. Technology, communication infrastructure, governance factors, foreign exchange reserves and foreign aids are significant factors in attracting FDI in developing nations. India has consistent results with developing nations.

Countries with huge market size (GDP), higher growth rates, greater proportion of international trade and a more business - friendly environment are prone to attract higher FDI inflows. Technology, & IT based techniques have substituted cheaper labour as a source of locational advantages. There has been consolidation at the theoretical level. Academic discourse reflects that theories now focus mostly on outward FDI pursued by developing nations. It also advocates paths for future research.