The determinants of Foreign Direct Investment (FOI) flows in selected OIC countries

Abstract

The objective of this study is to identify the determinants of foreign direct investment (FDI) in OIC countries. In order to undertake it, we perform a econometric model based on panel data analysis for OIC countries, consisting of 16 Asian OIC countries and 18 African OIC for the 1980-2000 period. Some estimated coefficients have the expected signs and are statically significant, such as market size and openness. The estimated negative sign on the variables exchange rate capturers the effect alters the price for acquiring assets in the OIC countries and it may lead to a substitution of export for foreign production. In this case of OIC countries exchange rate also depict that the exchange rate regime is by no mean neutral to FDI, there is a trade-off between maintaining external competitiveness, which needs some f1exibility in nominal exchange rate, and reducing foreign exchange volatility in order to attract FDI. Furthermore, the variables consumption prices index (CPI) positive by effect FDI for African and all OIC countries equation, implying that these countries can perform reasonably well under existing rate of inflation. The larger is a country's market, as measured by GDP, the higher is the level of foreign capital that the country receives. Since for all OIC countries considered the level of export, as a share of their GDP, is not high, the variable market may also indicate the OIC country's capacity to absorb foreign capital because not any amount of capital can be digested by any given economy. The government consumption of OIC countries was not significant suggesting that such factor does not play a role in attracting foreign investment. Finally, the variable openness captures the degree of openness of an economy of OIC countries. The estimated sign is positive, so that the more open economies in OIC countries more attractive to foreign capital flows, as expected.