Determinants of Foreign Direct Investment Flows
Summary
Foreign direct investment (FDI) flows arise from a complex interplay of economic, geographical, institutional and political factors that influence the decisions of multinational enterprises and host economies. Core economic determinants include market size, income levels and trade openness, which reflect demand-pull forces. Supply-side considerations, such as factor costs, infrastructure quality and availability of skilled labour, shape the comparative advantages of host locations. First-nature geography, encompassing natural resource endowments and proximity to major markets, interacts with second-nature geography—agglomeration economies, transport networks and digital connectivity—to create spatial patterns of investment. Institutional quality, expressed through governance, regulatory frameworks and political stability, underpins investor confidence and risk assessment. Macroeconomic stability, typified by inflation control, exchange-rate management and fiscal prudence, further conditions FDI by affecting both expected returns and financial risks. Recent work has also highlighted the role of global shocks—such as health pandemics—and evolving supply-chain realignments in reshaping FDI trajectories. Together, these determinants operate across multiple scales, from local urban clusters to regional trade blocs, with dynamic feedbacks that influence sustainable growth, technology transfer and development outcomes.
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Determinants of Foreign Direct Investment Flows publication trend
The graph below shows the total number of articles in determinants of foreign direct investment flows across all publications each year (not limited to Nature Index journals).
Technical terms
Foreign Direct Investment (FDI): Cross-border capital flows by a parent firm to establish lasting interest and control in a foreign enterprise.
Institutional quality: Composite measure of governance effectiveness, regulatory rigour, rule of law and control of corruption that shapes investor risk perceptions.
First-nature geography: Natural endowments such as resource availability, climate and proximity to major consumer markets.
Second-nature geography: Man-made spatial characteristics including urban agglomerations, transport corridors and digital infrastructure.
Trade openness: Degree to which an economy’s regulatory and tariff regimes facilitate cross-border exchange of goods and services.
References
- Do geography and institutions affect entrepreneurs’ future business plans? Insights from Greece. Journal of Innovation and Entrepreneurship (2023).
- Foreign Direct Investment and World Pandemic Uncertainty Index: Do Health Pandemics Matter?. Journal of Risk and Financial Management (2021).
- Identifying the robust economic, geographical and political determinants of FDI: an Extreme Bounds Analysis. Empirical Economics (2016).
- Determinants of FDI attractiveness: Evidence from ASEAN-7 countries. Cogent Social Sciences (2021).
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