A Mean-Variance Explanation of FDI Flows to Developing Countries

Eva Rytter Sunesen
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Eva Rytter Sunesen: Department of Economics, University of Copenhagen

No 08-17, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: An important feature of the world economy is the close global and regional integration due to strong trade and investment relations among countries. The high degree of integration between countries is likely to give rise to business cycle synchronisation in which case shocks will spillover from one country to another. This will have implications for the way investors evaluate the return and risk of investing abroad. This paper utilises a simple mean-variance optimisation framework where global and regonal factors capture the interdependence between countries. The model implies that FDI is driven by the risk-adjusted rate of return as well as global and regional spillovers. The preditions of the model are con rmed in a sample of 60 countries over the period 1970-2000.

Keywords: foreign direct investment; risk; portfolio; business cycles (search for similar items in EconPapers)
JEL-codes: E32 F21 G11 R11 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2008-08
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:0817

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