The Landscape of FDI Flows

Over the last forty years, the world has experienced a rapid rise in the level and significant shift in the composition of recipients of foreign direct investment (FDI) flows. Researching FDI is critical because of the increasingly important role it has in the global economy and the many potential benefits it provides investors and host countries. This paper will examine the past, current, and future state of FDI flows. An aggregate inflows dataset as well as a specific pair flows dataset will be analyzed to gain a better understanding of the drivers of FDI. The aggregate flows dataset contains data on FDI inflows and the potential determinants of market potential, stability, information, infrastructure, natural resources, and international trade for 229 countries from 1970-2010. The specific pair flows dataset contains data on the total level of FDI a parent country has in a host country and potential determinants of a gravity model, skilled labor differences, and cultural proximity variables for the years 2000 and 2004. Through the use of fixed effects panel and first differenced estimation techniques on the aggregate flows dataset market potential, information, natural resources, and the occurrence of an attempted coup are found to be positive and significant determinants of FDI. Using OLS estimation techniques for the specific pair flows dataset, a gravity model and cultural proximity are found to be positive and significant determinants of FDI, while skilled labor differences are found to have a negative and significant impact on FDI flows. This paper reinforces the previously researched importance of market potential, information, natural resources, the gravity model, and cultural proximity. For the most part, the impact of stability, international trade, and skilled labor differences on FDI is not clearly seen. The most interesting finding in the paper is the positive and significant sign on the attempted coup variable, which appears to be showing investors regaining confidence in the government in power after they witness an attempted coup fail. This research sheds further light on global patterns of FDI flows, but it is only the first step of many that need to be taken