Theories of Foreign Direct Investment: Diversity and Implications for Empirical Testing

Abstract

This paper argues that a large number of studies have been conducted to identify the determinants of foreign direct investment (FDI) inflows but no consensus view has emerged. This is particular in the sense that there is no widely accepted set of explanatory variables that can be regarded as the “true” determinants of FDI. The results of these studies are highly sensitive to differences in perspectives, methodologies, sample-selection and analytical tools. While many potential determining variables may be found to be statistically significant in cross-sectional studies, the estimated relations typically depend on the set of variables included in the regression equation. What may appear to be a significant determinant of FDI may be fragile, not robust. One suggestion to this problem is the use of extreme bounds analysis

Keywords:

• FDI
• methodology
• bounds analysis
• development
• empirical testing