Determinants and Dynamics of Foreign Direct Investment
Summary
Foreign direct investment (FDI) is driven by a complex interplay of country-level, firm-level and policy-level factors that shape both the propensity and direction of cross-border capital flows. At the country level, market size, per capita income, institutional quality and openness to trade create the locational advantages that attract investment, while labour costs, human capital and infrastructure influence cost- and efficiency-seeking motives. Firms leverage ownership advantages such as proprietary technology, brand reputation or managerial expertise, and internalise transactions when market imperfections make hierarchical governance more efficient than arms-length contracts. The global fragmentation of production, rising digital connectivity and participation in regional trade agreements have intensified vertical and horizontal FDI, altering the geography of value chains. Spatial interdependencies and third-country effects have become more salient, as investment flows respond not only to bilateral conditions but also to the network of neighbouring markets. Recent methodological advances integrate multi-criteria decision-making, spatial econometrics and structural gravity frameworks to disentangle these drivers. Understanding FDI determinants is vital for policymakers seeking to harness technology transfer, job creation and sustainable development while managing volatility and ensuring that investment aligns with strategic industrial objectives.
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Determinants and Dynamics of Foreign Direct Investment publication trend
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Technical terms
Foreign direct investment (FDI): Cross-border investment in a foreign enterprise with a lasting management interest, typically exceeding 10 per cent equity.
Gravity model: An empirical framework predicting bilateral FDI flows based on economic size (GDP) and geographic or policy distance.
Horizontal FDI: Investment aimed at replicating home-country production facilities in a host market to serve local demand.
Vertical FDI: Fragmentation of production stages across countries to exploit cost or factor-endowment differences.
Knowledge-capital model: A theoretical approach that integrates horizontal and vertical motives to explain FDI patterns using firm-specific advantages and market characteristics.
References
- Foreign direct investment performance drivers at the country level: a robust compromise multi-criteria decision-making approach. Technological and Economic Development of Economy (2024).
- FDI and the relevance of spatial linkages: do third-country effects matter for Dutch FDI?. Review of World Economics (2009).
- The Effect on Foreign Direct Investment of Membership in the European Union. JCMS Journal of Common Market Studies (2021).
- Determinants of outward FDI from emerging economies. Equilibrium Quarterly Journal of Economics and Economic Policy (2019).
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