Examining the Regional Aspect of Foreign Direct Investment to Developing Countries

This paper applies a general-to-specific analysis to detect regularities in the driving forces of foreign direct investment (FDI) that can explain why some regions are more attractive to foreign investors than others. The results suggest that regional differences in FDI inflows to African, Asian and Latin American countries can be fully explained by structural characteristics rather than fixed regional effects. The implication of this finding is that countries that are lagging behind other developing countries in attracting foreign capital have the opportunity to implement policies aimed at improving the investment climate for foreign investors. This also means that there is no African bias. Among a large number of return and risk variables applied in the empirical literature, growth and inflation turn out to be the only robust and significant FDI determinants across regions although the size of their impact varies.foreign direct investment; Africa, Asia; Latin America; general-to-specifc

Measuring Idiosyncratic Risk: Implications for Capital Flows

This paper offers two refinements of the traditional risk measure based on the volatility of growth. First, we condition GDP growth on structural characteristics of the host country that move only slowly and therefore can be partly predicted by an investor. Second, we adjust conditional risk for the systematic components due to the global and regional interdependence between alternative investment locations. The decomposition of conditional risk into its systematic and idiosyncratic components reveals that not only are African countries on average characterised by a larger conditional risk than Asian and Latin American countries, but the idiosyncratic risk factor also represents a larger share than in other developing countries. As a final contribution, we search the empirical literature on foreign direct investment and risk in order to determine which of the suggested risk measures provide the best description of idiosyncratic risk. Using a general-to-specific methodology, we find that both economic and political risk factors are important elements in the investment decision. We also find that commercial risk factors applied in the literature so far are poor determinants of idiosyncratic risk.foreign direct investment; global and regional business cycles; risk decomposition

A Mean-Variance Explanation of FDI Flows to Developing Countries

An important feature of the world economy is the close global and regional integration due to strong trade and investment relations among countries. The high degree of integration between countries is likely to give rise to business cycle synchronisation in which case shocks will spillover from one country to another. This will have implications for the way investors evaluate the return and risk of investing abroad. This paper utilises a simple mean-variance optimisation framework where global and regonal factors capture the interdependence between countries. The model implies that FDI is driven by the risk-adjusted rate of return as well as global and regional spillovers. The preditions of the model are con…rmed in a sample of 60 countries over the period 1970-2000.foreign direct investment, risk, portfolio, business cycles

Economic Impact of Foreign-owned Firms in the EU and Germany. Bertelsmann Policy Brief #2020/02

In times of Trump and Brexit, protectionist tendencies seem to be a global trend. The advantages that economic interconnectedness implies are increasingly receding into the background. Foreign-owned firms in the EU and Germany, however, make a considerable contribution to employment and gross domestic product (GDP). Nowadays