Determinants of Foreign Direct Investment to Developing Countries

In this paper we explored different factors responsible for variation in foreign direct investment to developing countries. We used macro panel data of 57 low and lower middle income countries for last ten years (2000-2009) to empirically address this question. We used instrumental variable technique to correct for reverse causation and omitted variable bias in our estimates. In addition, we also controlled for country specific and time specific fixed effects to obtain unbiased estimates. This study found that market size is the most important determinant of foreign direct investment to developing countries. Further, stable macroeconomic environment, global integration, availability of skilled labor force and developed financial sector also promote foreign direct investment in developing countries.