Estimating the determinants of foreign direct investment inflows: how important are sampling and omitted variable biases?

Estimating the determinants of foreign direct investment inflows: how important are sampling and omitted variable biases?

Published Jan 2004

Authors

Y. Kinoshita, N. Camposs

Publisher

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What factors influence FDI decisions in transition economies?

This paper investigates the importance of institutions vis-à-vis factor endowments as determinants of FDI inflows to the transition economies in Central Europe and in the former Soviet Union. In order to do so the paper uses panel estimation on data for transition economies during the 1990s.

Main findings of the study include:

  • FDI inflows are determined by the availability of natural resources and low labour costs
  • poor quality of the bureaucracy is found to be a deterrent to foreign investors as the increased transaction costs adversely affect profitability of investment projects
  • the rule of law is also an important determinant of FDI in transition economies
  • foreign investors prefer transition countries that are more open to trade and with fewer restrictions on FDI
  • progress on external liberalisation also plays a large role
  • FDI motives vary greatly between the non-CIS and the CIS countries: in the non-CIS countries that receive FDI mostly in the manufacturing sector, institutions and agglomeration are the main considerations for investors. In the CIS countries that receive FDI mostly in the resource sector, natural resource abundance and infrastructure are the crucial factors.

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