Foreign direct investment and the investment climate of developing countries in the Western Hemisphere

The structure of capital flows to developing countries around the globe has changed considerably since the 1970s. In the Western Hemisphere specifically, foreign direct investment (FDI) accounted for a much larger share of total inflows than any other type of capital by the end of the 1990s. This trend has not escaped recognition by economic theorists, and a large literature has emerged as researchers attempt to understand why some countries attract more FDI than others.; This study examines the impact of changes in the investment climate on a country's ability to attract FDI flows relative to other countries. Specific attention is given to the developing countries of the Western Hemisphere. The investment climate is broadly defined as (i) governmental policies and regulations that affect the relative "openness" of the country to FDI, (ii) factors that impact the potential return on capital to foreign investors, and (iii) the level of political risk and corruption in the host country.; Analyzing the impact of changes in these types of factors over time revealed some interesting results. First, there is evidence to suggest that the state of the investment climate is an important consideration for foreign investors. Second, FDI in large (in terms of GDP), relatively unstable economies tends to be the most responsive to small changes in the investment climate. Conversely, in small economies that either receive substantial amounts of official development assistance or are dominated by a single industry (e.g., the production of oil), FDI tends to be less responsive to changes in the investment climate.; Finally, the results make clear that, across the sample of countries, there is no single model that can explain all of the differences in the level of response to changes in the investment climate. In other words, the relative impact of investment climate variables on the level of FDI differs according to the economic, political and social conditions inherent to each country. Thus, it is likely that future research into the issue will yield more interesting results if analysis is conducted on a country-by-country basis.