JSPES, Vol. 30, No. 4 (Winter 2005 )
pp. 497-516

Foreign Direct Investment Flows into Developing Countries: Impact of Location and Government Policy

Shah Tarzi

This study addresses vital questions: First, why a select group of developing countries receives the lion’s share of Foreign Direct Investment (FDI), while the overwhelming majority of less developed countries are left behind? Second, whether and to what extent FDI inflow is a function of a country’s FDI policy regime? The study identifies market size, the rate of growth in market size, economic competitiveness, infrastructure, and worker productivity as key location factors. Further, several specific FDI and trade policies are germane to attracting a significant volume of FDI. These include lowering the ratio between the volume of FDI that is approved, as against the FDI actually undertaken by streamlining the approval process and removing arbitrary foreign ownership ceilings in sectors open for FDI deter foreign investment. In addition, the ability of foreign direct investors to repatriate capital and remit profits, setting up special economic zones to facilitate FDI, lowering regulatory burdens, and flexible labor policies are desirable vehicles for attracting FDI.