Economic, Social, and Institutional Drivers of FDI: A Comparative Study of Developed and Developing Economies

Sarmad Sattar, Aramish Altaf Alvi and Marc Audi

MPRA Paper from University Library of Munich, Germany

Abstract: This study examines the determinants of foreign direct investment inflows by categorising them into three overarching dimensions, which are economic, social, and institutional. Recognising the heterogeneity of global economies, the analysis differentiates between developed and developing countries according to income classifications. Based on panel data for 178 countries covering the period from 1996 to 2019. The empirical results reveal notable differences in the drivers of foreign direct investment across income groups. In developing countries, economic factors such as market size, trade openness, and macroeconomic stability emerge as the most influential determinants. This explains that investors in less mature markets place the greatest importance on strong economic fundamentals. In contrast, in developed economies, social factors, including infrastructure quality, education levels, and human capital development, play a more prominent role in attracting foreign direct investment. This reflects investors’ greater responsiveness to social infrastructure and workforce capabilities in advanced markets. Institutional factors such as governance quality, regulatory frameworks, and political stability show a weak and statistically insignificant relationship with foreign direct investment inflows in both developed and developing countries. This finding challenges the prevailing view that strong institutions are a prerequisite for attracting foreign investment and indicates that their influence may be context-dependent or overshadowed by more immediate economic and social considerations. Overall, the study provides a nuanced understanding of the heterogeneous nature of foreign direct investment determinants and highlights the need for policy strategies that are tailored to the specific developmental stage and structural characteristics of each country. These insights can help policymakers align economic and social development priorities more effectively with the objective of enhancing foreign direct investment attractiveness.

Keywords: Foreign Direct Investment; Economic Determinants; Social Infrastructure; Institutional Quality (search for similar items in EconPapers)
JEL-codes: F21 O1 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-fdg and nep-inv
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