Economic Determinants of Foreign Direct Investment in Less Developed Countries

Abul F. M. Shamsuddin


This study examines the economic determinants of private
foreign direct investment (FDI) by using a single-equation econometric
model for 36 LDCs for the year 1983. The market size of the host country
as measured by per capita GDP is found to be the most important factor
in attracting FDI. The other important variables which influence FDI are
found to be the cost factor (such as wage cost) and the investment
climate in the host country (represented by such variables as per capita
debt). The inflow of per capita public aid and economic instability,
proxied by the volatility of prices, are other important factors
affecting the flow of FDI. While larger market size and increased inflow
of public aid attract FDI, the higher wage cost, poor investment
climate, and economic instability in the host countries reduce the
inflow of FDI. The model used to obtain these results is found to be
structurally stable across countries.

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