The IUP Journal of Applied Economics
Assessing the Determinants of FDI in Emerging Markets: Do Natural Resources and Institutions Matter?

Article Details
Pub. Date : Jul, 2019
Product Name : The IUP Journal of Applied Economics
Product Type : Article
Product Code : IJAE41907
Author Name : Anup M Nandialath and Tim Rogmans
Availability : YES
Subject/Domain : Economics
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No. of Pages : 20

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Abstract

The role of Foreign Direct Investment (FDI) in economic development is a well-researched phenomenon. However, extant research has failed to arrive at a consensus on the key drivers of FDI, and the literature is particularly eclectic on the role of natural resources and institutions and how they influence FDI. The present paper argues that this lack of consensus is due to model uncertainty. Drawing on more recent literature on model uncertainty and the determinants of FDI, the paper uses a Bayesian Model Averaging (BMA) approach to find that neither natural resources (oil and gas) nor institutional quality is a robust predictor of FDI flows into 16 countries in the Middle East North Africa (MENA) region. The analysis shows that FDI flows are determined by per capita GDP and oil prices. Given the complexity and volatility of the international business environment, it is more important than ever that economic policy decisions are based on robust models that take into account model uncertainty.


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Foreign Direct Investment (FDI) is generally considered as desirable for the economic development of host countries, especially in emerging markets. Following the Asian debt crisis of 1997, FDI is seen as a more stable source of capital than portfolio investment (Lipsey, 2001). FDI is also said to have important spillover effects, such as transfer of technology and managerial expertise (Lipsey, 2001; and Meyer and Sinani, 2009). The question as to what are the determinants of FDI flows is therefore an important one for policymakers and academics alike, with the attraction of FDI now a key economic policy goal for governments in emerging markets. A significant number of studies have either considered the impact of individual elements on FDI flows (e.g., Globerman and Shapiro, 2002; and Bénassy-Quéré et al., 2007) or attempted to construct an overall model of the determinants of FDI flows (Jun and Singh, 1995; Chakrabarti, 2001; and Sethi et al., 2003).

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