A sensitivity analysis of foreign direct investment determinants in developing countries during the 1990s

This research project explains why Foreign Direct Investment (FDI) is the largest source of foreign private capital in developing countries. To provide a comprehensive answer, we divide the project into three separate papers. The first paper consists of analysis of the stylized facts of the evolution of private capital flows to developing countries. We find that capital account liberalization and legal reforms in the early 1990s triggered the growth of foreign capital flows to the developing world. We also find that the dispersion of flows among countries depends on the level of income and institutional quality: poorer and institutionally weaker countries get less foreign investment and usually only receive FDI. Finally, we show that the onset of the financial crises of the 1990s changed the composition of flows toward FDI and made developing countries rely almost exclusively on FDI as a source of foreign capital.; The second paper analyses the sensitivity of FDI determinants in developing countries using the Extreme Bound Analysis technique, the decomposition of the dependent variable and a unique sample of 80 developing countries. We find that trade openness, governance, political risk and agglomeration are robust determinants of FDI. Finally, in the third paper, we carry several sensitivity analyses to of the regional FDI determinants. We find that agglomeration, governance and returns on FDI are important determinants across countries in the same region and across developing regions. Moreover the third paper also shows that the share of FDI in capital flows grows with negative socio-economic characteristics in the host countries such weak governance or low infrastructure.; In sum, the research project (i) underlines the importance of physical and institutional infrastructure to attract FDI in developing countries, (ii) supports prior findings on the growing importance of vertical FDI strategies in developing countries, (iii) and confirms that FDI is not always and indication of positive economic and institutional development.