Determinants of Foreign Direct Investment: A Systematic Review of the Empirical Studies
| Published date | 01 May 2024 |
| DOI | http://doi.org/10.1177/00157325231158846 |
| Author | Mohammad Shaiful Islam,Ahmed Beloucif |
| Date | 01 May 2024 |
Determinants of Foreign
Direct Investment:
A Systematic Review
of the Empirical Studies
Mohammad Shaiful Islam1 and Ahmed Beloucif2
Abstract
A growing body of literature is concerned with the factors that determine the
inflows of foreign direct investment (FDI) into a host country. However, hardly
any literature has been carried out to provide a systematic literature review
(SLR) of the FDI determinants. An SLR methodology underlies this conceptual
paper to evaluate and categorise a literature survey of 112 empirical studies pub-
lished from 2000 to 2018. The result indicates that the size of the host market is
the most robust determinant, followed by trade openness, infrastructure quality,
labour cost, macroeconomic stability, human capital, and the growth prospect
of the host country. Market size is highly significant in virtually all studies. This
partly reflects the fact that most of the world’s FDI are market-seeking. This
study provides a clear understanding of the scope of the research in the field of
FDI determinants as the practical implication for future research.
JEL Code: F14
Keyword
Developing world, financial investment/analysis, international business, theoretical
and empirical research in cross-border issues
Original Article
Foreign Trade Review
59(2) 309–337, 2024
© 2023 The Author(s)
Article reuse guidelines:
in.sagepub.com/journals-permissions-india
DOI: 10.1177/00157325231158846
journals.sagepub.com/home/ftr
1
University of Hertfordshire, Hatfield, Hertfordshire, United Kingdom
2
School of Business and Creative Industries, University of the West of Scotland, Paisley Campus,
UWS School of Business and Enterprise, Paisley, United Kingdom
Corresponding author:
Mohammad Shaiful Islam, University of Hertfordshire, Hatfield, Hertfordshire AL10 9AB, United
Kingdom.
E-mail: m.islam27@herts.ac.uk
310 Foreign Trade Review 59(2)
Introduction
Foreign direct investment (FDI) is defined as an investment made to acquire a
lasting interest in enterprises operating outside of the economy of the investor
(IMF, 1993; WTO, 1996). In contemporary business environments, an increasing
number of multinational corporations are engaging in FDIs. These companies are
mainly motivated by the prospect of high profitability, along with the possibility
of reducing the cost of production, gaining access to the local market, acquiring
natural, physical, or human resources of higher quality at a lower cost, and raising
efficiency to improve global market position (Dunning & Lundan, 2008).
The inflow of FDI is often considered an essential ingredient that spurs eco-
nomic growth by bringing technology, knowledge, capital and jobs, which are likely
to generate a positive impact on the host economy (Cambazoglu & Simay Karaalp,
2014). Therefore, governments of many developing and least-developed countries
have unequivocally entrusted the private sector and foreign investors to transform
their economies and accelerate economic growth. Consequently, many countries
around the world are opening their economy to foreign investors, restructuring and
liberalising their FDI regimes, and offering various fiscal and non-fiscal incentives
to attract the optimal level of FDI. However, many countries are not able to attract
their potential level of FDI, as the movement of FDI depends on several economic,
political and institutional factors. Thus, the research in international business eco-
nomics has gained substantial attention to empirically investigate the determinants
of FDI inflow (e.g., Asiedu, 2002; Chakrabarti, 2001; Leonardo et al., 2018; Moosa,
2009; Tang, 2017; Wijeweera & Mounter, 2008). However, hardly any systematic
literature review (SLR) methodology has been adapted. To complement that impor-
tant methodological gap, this study provides a systematic review of the existing
literature on the area of FDI determinants by adopting a structured and robust SLR
methodology proposed by Denyer and Tranfield (2009).
A survey of 112 empirical studies published between 2000 and 2018 is reviewed.
The article has identified several economic, political and institutional factors as the
significant determinants of FDI. The result indicates that the size of the host market
is the most robust determinant, followed by trade openness, infrastructure quality,
labour cost, macroeconomic stability, human capital and the growth prospect of the
host country. Market size is highly significant in virtually all studies. This partly
reflects the fact that most of the world’s FDI are market-seeking.
The next section presents a rigorous SLR methodology, formulates the under-
lying research question and explains the principles for the selection and evalua-
tion of the databases and journals. Next, the analysis and synthesis of the existing
literature are presented, followed by the results of the systematic review. The
study concludes with the key findings in the literature, along with implications for
researchers and directions for further investigations.
Systematic Literature Review (SLR) Methodology
A traditional literature review is a summary and critical analysis of the prior relevant
literature on the topic being studied (Hart, 2018), whereas a systematic review uses
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