Introduction
Both the developing and other developed countries are focused on increasing the amount of foreign direct investments within the economy. The requirement of cash and financial resources within an economy are minimum, and therefore, they require additional investment to support the development and operational processes. Research has revealed that the amount of foreign direct investments in most of the developing countries has increased including Indonesia, Malaysia, Pakistan, etc.) (Azeem et al., 2012). The core reason for the increase in FDI is that foreign investors earn higher returns on their investments in developing countries. The FDI not only increases the foreign investment inflows but also helps to enhance the transfer of technologies and employment opportunities between countries. It also helps countries to increase savings and also to maintain and improve the economic growth.
Determinants of FDI
Analysts and economists have studied Foreign Direct Investments (FDI) in details, and there are many theories available that help to explain the significance of FDI and also to establish an understanding of the determinants. Onder & Karal (2013) emphasize on the importance of specific factors in determining the level of Foreign Direct Investments. The researcher uses a regression analysis and the data set of Turkey from the year 2002 to 2011. Onder & Karal (2013) find out that population, per capita GDP, infrastructure, and exports have a positive relationship with FDI. The researcher also finds out that the distance of the country, inflation rate, rate of tax, and commercial profits of the host nation/country have a negative relationship with FDI (Onder & Karal, 2013; Rady, 2012).
Methodology and Variables
Methodology
The aim/objective of the current paper is to identify the significance/importance of the identified factors to determine the level of FDI for eighty-eight (88) countries for the year 2012. The researcher uses a primary source of data to analyze the results; the data for 88 countries is tested using the great software.
Variables
The dependent variable of the study is FDI. The independent variables for the paper are Wages (i.e. Labor cost per hour), Manufacturing (percentage of GDP), Literacy rate (age over 15), Primary (expenditure on primary education), Tertiary (Expenditure on tertiary education), Corruption (index - high value of index present low level of corruption), Stability index (political stability and violence), Imports (in millions of U.S. dollars), Exports (in millions of U.S. dollars), Inflation Rate, Real GDP growth, and Electricity.
Findings, results and Discussion
The regression analysis reveals that there is a significant impact of all the identified independent variables on FDI (since, P-value (F) 6.94e-06 less than .05 standard significance value for regression). The results also show that the relationship is steady (R-Square value is 0.4386 i.e. is equal to 43.86%) it means that the independent variables can predict the dependent variable up to 43.86% and vice versa.
Model 1: OLS, using observations 1-88
Dependent variable: FDI
The in-depth analysis of specific variables shows that there is a significant and negative relationship between Manufacturing and FDI. It means that the increase in manufacturing units within the economy (increase in the percent of GDP) will reduce the amount of Foreign Direct Investments within the economy. The developed countries have more manufacturing businesses, and therefore, the requirement for external investments is not significant, foreign investors do not find such countries attractive as they do not get Supernatural returns on their investments. The results indicate that all other variables like wages, spending on primary education and tertiary education, corruption, index of stability, imports and exports, and inflation of the host company have no significant relationship with FDI. On the other hand, the constant variable, Literacy Rate, and Growth of Real GDP have an important positive relationship with FDI. The results mean that the amount of children and adults above fifteen who are literate play an important role in improving the level of foreign investments. It means that education is essential to attract foreign investors. The growth in real GDP of a country also plays a significant role in enhancing the level of foreign investments which means that the progress of a country is essential to attract foreign investments/investors.
Conclusions
The results of the evaluation/analysis show that some of the overall specified variables have a significant relationship with FDI. It can be concluded that the literacy rate, manufacturing, and real GDP are the most important indicators/determinants of FDI. The countries must focus to enhance their literacy rate and real GDP growth to achieve a higher Foreign Direct Investment (FDI).
Bibliography
Azeem, S.W., Hussain, H. & Yasir, H.R., 2012. The Determinants of Foreign Investment in Pakistan: A Gravity Model Analysis. Log Forum, 8(2), pp.81-97.
Onder, G. & Karal, Z., 2013. Determinants of Foreign Direct Investments Outflow From a Developing Country: The Case of Turkey. Business, Management & Education / Verslas, 11(2), pp.241-55.
Rady, T., 2012. Foreign Direct Investment and Growth: Theory, Evidence and Lessons for Egypt. Journal of International Business Research, 1(11), pp.1-13.
