THE DETERMINANTS OF FDI IN SMALL DEVELOPING NATION STATES: AN EXPLORATORY STUDY

Since the decade of the eighties, developing countries began to implement more liberalized trade and investment policies in an effort to attract greater inflows of Foreign Direct Investment (FDI). Many of these countries were successful in attracting considerable amounts of foreign investment. Unfortunately the bulk of FDI inflows were concentrated in a small group of East Asian and Latin American countries with China emerging as the main beneficiary. Many small developing countries, however, have failed to benefit from the explosive growth which occurred during this period. The paucity of FDI flows is linked to the weak regulatory reform system that currently exists in many of these countries. Using cross sectional data, the paper seeks to identify some of the factors that would help to increase the inflows of FDI into these nation states. Tourism, infrastructure, economic growth and openness were found to be the principal variables that attract FDI to these countries. Contrary to expectation the role of market size as a determinant was found to be insignificant. Over the last two decades most developing countries have moved away from being state-driven and inwardly focused toward a free market-oriented development strategy (Kobrin 2005). This shift in policy position has seen greater emphasis being placed on attracting Foreign Direct Investment (FDI) because it was anticipated that such inflows would help to alleviate the financial, technological and skill deficits that existed in many of these countries (Balasu bramanyam et al. 2001). In this regard many developing countries, starting from the decade of the eighties, began to replace laws and regulations that had inhibited the flows of FDI with more liberal investment regimes as part of an outward-oriented trade reform