How to make yourself attractive to foreign investors: An analysis of inward FDI between OECD countries

Sigurd Brinck

Student thesis: Master thesis

Abstract

In recent years there has been a rapid growth in both trade goods and capital flows. Among the latter, FDI (Foreign Direct Investments) have grown faster than those of goods and service. The question of what the host countries can do to make itself more attractive to FDI is therefore investigated in this thesis. Most previous studies on FDI determinants have been based on research designs characterized by a large sample including developing countries as well as already developed countries. But FDI determinants that influence the level of FDI activity vary across less developed countries and developed countries. Moreover, most of scholarly literature faced challenges concerning the methodology, data quality and analytical framework, which for most part induced inconclusive findings about the FDI activities. This thesis aims at overcoming a large majority of these challenges by sampling OECD countries and applying the gravity model in combination with Pooled Regression and Country-pair Fixed Effect. This thesis applies panel data on bilateral FDI flows from an individual source to destination countries (dyadic) between 1993 and 2012 to empirically analyze the determinants of inward FDI. The dataset contains 5038 observations and 411 dyadic combinations of 21 OECD countries from 1993 to 2012. This thesis finds that the number of patent applications under PCT are expected to increase inward FDI (everything else being equal) in both types of gravity models. The findings also indicate that Corporate tax and Energy price do not seem to affect expected inward FDI among the 21 OECD countries, ceteris paribus. Moreover, the effect of geographical distance has not changing significantly over the 20 years despite the debate about the ‘death of distance’ in era of globalization and so on. Keywords: Inward FDI, OECD countries, patent, human capital, corporate tax, gravity model

EducationsMSc in International Business and Politics, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2014
Number of pages112