Foreign direct investment and its drivers: an empirical comparative

study on developed and developing countries

NEVILA BACI, GJERGJI MULLA, DENISA MILLO, KLEI XHYHERI

Department of Statistics and Applied Informatics

University of Tirana

Mother Teresa Square, 4

Abstract: Foreign Direct Investment plays an important role in a country’s economic activity because of its posi-

tive effect on economic growth. In developing or transition countries foreign capital is considered one of the most

stability, and population. From all these factors, only inflation tends to decrease the Foreign Direct Investment

inflows in a hosting country, and hence, governments in developing countries must give more attention to these

Key-Words: Foreign Direct Investment, economic, growth, development, panel data, fixed and random models.

Received: September 11, 2021. Revised: June 17, 2022. Accepted: June 26, 2022. Published: July 20, 2022.

opment in technology contributed more to spreading

nomic development for developing countries.

by FDI. The first way, exporting is the simplest, it is

portunity to control their production or take advantage

In comparison to exporting, FDI has an obvious ad-

vantage as it provides greater opportunities for the

companies to gather information about local demand

ing competition in the global market, and diversifi-

cation of the economy. Governments of developing

to attract new investment and improve the investment

all economic development of the hosting country, be-

cause of their positive effect on accelerating economic

growth [2]. Foreign capital is considered the most im-

portant source of economic growth in many develop-

ing or transition countries. This source helps govern-

ments continually lead the creation of new jobs and

influence new waves of technological innovation [3].

becoming an important challenge to design appropri-

ate policy responses.

oped countries is based on the World Bank classifica-

We will focus our study on identifying the main fac-

tors that attract FDI in two main groups of countries,

developed countries and developing ones.

indicators, inflation indexes, economy size, and trade

is yet no consensus on the relationship between FDI

than economic ones.

The main contribution of this study will be the con-

tribution of analyzing not only the economic factors

affecting FDI inflows in developing countries but also

institutional and political factors.

The remaining part of the paper is organized as fol-

the background to our study regarding the FDI in-

flows and their determinants. The research methods,

dataset, and variables as well as the empirical frame-

based on different sources. We will also provide its

classification into several types and classifications ac-

cording to the purpose of investing in a foreign coun-

into three main categories: portfolio, FDI, and others

tion of groups of assets such as stocks, bonds, and eq-

uities becoming a source of income for investors. In

this type of investment as shown in Figure 1, investors

bilizing assets and expanding to the global market.

Figure 1: Capital flow Source [16].

While the definition of FDI has shifted over time, it

essentially holds the same concept. According to the

classic definition, FDI will be considered the invest-

country (host country) controlling ownership in it [7].

ment must be focused on the long-run sustainable in-

of FDI since they intensify the global competition

between products, markets or infrastructures.

• FDI aimed at regional diversification and integra-

be beneficial to the countries of origin by ensur-

ing expansion of the capacity of the existing mar-

nomic factors that may affect the FDI inflow are

macroeconomic factors such as market size, labor

cost, GDP, etc. Among all these factors, market

volume or market value known as market size are

widely used factor in many empirical studies [18, 19].

A larger market will allow better utilization of re-

sources, especially for the market seeking the type

in different empirical studies. In case the regulatory

institutions are increased, the FDI flows are decreased

as governments are putting more pressure and control

relationship between FDI and institutions’ determi-

that developed countries still attract a higher share of

worldwide FDI inflows than developing countries.

ruption index. Many studies show a negative im-

pact of corruption on FDI. Different indexes for mea-

nually by the global organization Transparency Inter-

As we mentioned, some important economic factors

FDI are going to be attracted by the hosting country.

tor is less important for investors who have decided

to produce in the host country and then export their

projected benefits.

offers interesting opportunities.

comparison to the developed ones, classified as

is considered as limited partner, limited liability

well as joint stock companies owned collectively

short term, especially in developing countries.

Identifying the main factors impacting FDI in devel-

foreign investment as an important action taken in de-

ing poverty.

3 Methodology

termination of the factors impacting FDI in develop-

flects in the differences between countries selected in

this study and time series that reflects in the change

within countries over time.

First, we applied multiple linear regression models

to model the relationship of FDI and its determinants

helps to identify some determinants that are supposed

to influence the structure of FDI.

analyses to our study, we can better discover causal

relationship. Panel data analysis is a combination of

cross-sectional data with time series data used for

dynamic analyses for the treatment of variables [31].

flects in the differences between countries selected in

this study and time series that reflects in the change

sidered random instead of a fixed value. Hausman test

differentiate the two panel data models, fixed effects

estimated obtained by the two models.

In our study, the countries selected do not have very

tionship between the FDI inflows and the explanatory

over the time period 1996-2019. In Figure 2 it is illus-

and developing countries too. All the hypotheses will

these groups of countries. As the scope of this work is

ware and R. Using OLS (Ordinary Least Square), we

nificant in explain the variation in the FDI inflows by

economic, institutions and political risk variables.

We state the first model as follows:

Model 2- developed countries.

Figure 3 shows the latest situation of FDI for all

economies, and economies in transition. Analysing

countries shrank by 6%, while the inflows in the de-

veloping countries demonstrated to be more resistant.

ing provides evidences that the FDI determinants im-

pact differently the FDI inflows based on categories

in which the country belongs: developed, developing

tries selected in this study.

ing countries selected in this study between 2001 and

2019 range from the maximum and minimum of 37.27

The first model applied is not considering the dif-

ference between developed and developing countries.

gories (10 developed economies and 16 developing

sights of potential factors that attract FDIs in these

Levene’s test is used to check the homogeneity of

As previously stated, after finding empirical evi-

dences that the means inflows of FDI in the devel-

oping economies and developing ones differs signifi-

cantly, we will apply the other model (model 2). In

opment in these economies and contributing directly

many important projects are implemented as ODA

and positive impact of ODA in FDI inflows is ex-

In the model two (2) we have excluded all the data of

results of are given in table 8.

for developing countries are unemployment, ODA,

tion in these countries.

tries will be associated with an increase in the FDI in-

indicate that variable political stability and absence of

violence/terrorism has significant and positive impact