Effects of Economic Conditions on Foreign Direct Investment: Country Level Panel Data Analysis

Abstract

Foreign direct investment (FDI) has long been a major source of financing for infrastructure and commercial projects, especially for developing nations. This paper explores a panel data analysis of the economic conditions that affect levels of FDI inflow, with a sample set consisting of 18 countries from 1981 to 2014 on a quarterly basis. Variables considered include macroeconomic conditions such as GDP, stock market performance, interest rates of varying terms, crime perception, and trade openness. The final model(s) discussed establish that FDI inflow is positively correlated with strong GDP and stock market performance as well as, surprisingly, 3- month and 10-year interest rates. Trade policies and crime perception seem to act with a significant lag, and the effects of many variables seem to depend on the development status of the country as well.