Drivers of FDI in small states

Abstract

This paper examines the determinants of FDI in small states, as only a small number of studies have analyzed the determinants of FDI in these countries. Small states have particular features that justify the need for a deeper analysis. Based on a panel data for 42 small states between 2005 and 2019, results clearly indicate the importance of the quality of human capital and the availability of infrastructures as the strongest drivers of FDI in small states. The country's level of openness, the availability of natural resources, the level of corporate tax and control of corruption also seems to play a relevant role therein. Moreover, the results suggest that the determinants differ depending on the region to which the country belongs and differ between island and non-island countries. These results can help small countries in defining policies that help them to attract FDI, which is crucial for their sustainable development.

Keywords:

• FDI
• small countries
• location advantages
• FDI determinants

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 The exception is for Iceland, but which also has restrictions related to being an island with low population.

2 We decide not to include the study of Teixeira and Nascimento (2019) in this analysis as it follows a completely different approach from the other studies: it is based on an analysis at the firm level and is “partially based on intentions to FDI rather than effective investment” (Teixeira and Nascimento, 2019, 371).

3 The World Bank considers total natural resources rents as the sum of oil rents, natural gas rents, coal rents, mineral rents, and forest rents. Indeed, it is a more comprehensive measure and can better assess the availability of resources of small states.

4 Initially, the time period was supposed to start in 2000, as before 2000 there was almost no data collected for small states. Nonetheless, after collecting all the data, it was possible to conclude that between 2000 and 2004 there were several gaps in some variables in many countries. Even so, there were a few missing values that were completed through the average of the values of the two closest years. The list of countries is on Table A1 in appendix.

5 Since FDI in the European region is clearly higher than in the other regions, as evidenced in figure 1 (mainly due to the values recorded by Malta and Cyprus), we also estimate all models excluding the five countries from this region but this did not introduce significant changes in the results. The results of these estimations are available on request.

6 The results for the case of Europe should be interpreted with caution as it only includes 5 countries, so the number of observations is relatively small.

Additional information

Funding

This research has been financed by Portuguese public funds through FCT - Fundação para a Ciência e a Tecnologia, I.P., in the framework of the project with reference UIDB/04105/2020.

Notes on contributors

Rosa Forte

Rosa Forte is Assistant Professor at the Faculty of Economics, University of Porto where she currently teaches international trade, microeconomics and project evaluation, and researcher at CEF.UP. She holds a PhD in Economics from the University of Porto. She is currently undertaking research in FDI determinants and motives and determinants of firms' export performance. Some of her recent publications are the following:

Barriers to FDI in the European Union Countries: The Perception of Foreign Subsidiaries, Journal of East-West Business, 2021, Vol. 27 N°. 1 p. 30–56 DOI: 10.1080/10669868.2020.1822487 (with Paiva, C.)

Debt-performance relationship and firms' international trade activities, MANAGERIAL FINANCE, 2021, Vol. 47 N°. 4 p. 487–505 DOI: 10.1108/mf-04-2020-0162 (with Botelho, A.)

Environmental regulation and FDI attraction: a bibliometric analysis of the literature, Environmental Science and Pollution Research, 2021, Vol. 28 N°. 7 p. 8873–8888 DOI: 10.1007/s11356-020-11091-6 (with Santos, A.)

Does Foreign Presence Induce Host Country Firms' Exit? The Case of Portugal, International Advances in Economic Research, 2019, Vol. 25 p. 323–337 (with Sarmento, P.)

The relationship between debt and a firm's performance: the impact of institutional factors, MANAGERIAL FINANCE, 2019, Vol. 45 p. 1272–1291 (with Tavares, JM)

Financial Constraints and Small and Medium-Sized Firms' Export Propensity: Evidence from Portuguese Manufacturing Firms, International Journal of the Economics of Business, 2018, p. 1–19 (with Salomé Moreira, A.)

Labour market flexibility and FDI attraction: A macroeconomic analysis, Panoeconomicus, 2021, Vol. 68 Nº. 3 p. 267–291 DOI: 10.2298/pan180116030o (with Oliveira, P.)

Prior education and entrepreneurial intentions: the differential impact of a wide range of fields of study, Review of Managerial Science, 2017, Vol. 11 p. 353–394 (with Teixeira, A.)

Cristiana Neves

Cristiana Neves holds a Msc in International Business from the University of Porto.