One theory for how to best help developing countries is to increase their inward flow of foreign direct investment (FDI). However, identifying the conditions that best attract such investment flow is difficult, since foreign investment varies greatly across countries and over time. Knowing what has influenced these decisions and the resulting trends in outcomes can be helpful for governments, non-governmental organizations, businesses, and private donors looking to invest in developing countries.
A 2008 study from scholars at Duke University and Princeton University published in the American Journal of Political Science, “The Politics of Foreign Direct Investment into Developing Countries: Increasing FDI through International Trade Agreements” (PDF), examines trends in FDI from 1970 to 2000 in 122 developing countries to assess what the best conditions are for attracting investment.
The study’s findings include:
- Countries that had higher rates of participation in international trade institutions (for example, the World Trade Organization) saw a 9% to 10% boost in FDI.
- Signatories of Bilateral Investment Treaties experienced an average 11.1% increase in FDI.
- For each increase in the level of measures of political instability, countries’ FDI was reduced by an average of 2.6%.
- Each level of reduced domestic political constraints was associated with an average 5.5% increased foreign investment.
The study found the major contributing factor to increasing FDI flow was internal policy reform relating to trade openness and participation in international trade agreements and institutions. The researchers conclude that, while “democracy can be conducive to international cooperation,” the strongest indicator for higher inward flow of FDI for developing countries was the number of trade agreements and institutions to which they were party.