On the Determinants of Foreign Capital Flows - DAAD partnership ...

In addition, Dunning’s underlying theory of FDI does suggest that pull factors lie as the
foreground to injecting investment in an economy in terms of the OLI paradigm. Thus, fiscal
incentives may be thought as secondary - as confirmed by Morisset (2003.) The work of
Krever (2005) reiterates the latter fact by admitting that tax ranks low in the long list of
factors considered by investors since they will go for a two stage process whereby they will
first start by “screening countries based on fundamental determinants” and only those
economies which satisfy the first stage requirements will go through the later one of being
“evaluated in terms of tax rates, grants or other incentives as considered.”
Attracting FDI is very demanding, especially in this globalized era. Policy-makers have
therefore become increasingly interested in understanding the motivating factors underlying
FDI. The driving force is “improving investment incentives for foreign investors” (Zitta &
Powers, 2003). Although a number of investigations have been conducted in this area
(Blomström & Kokko, 1998), not enough is known about the specific motivations that
influence particular investment flows.
4. METHODOLOGY AND ANALYSIS
4.1 MODEL SPECIFICATION
Based on literature review, no concrete conclusion can be reached to which variable has the
greatest and positive impact on FDI since each and every country differs. The main
objective is to determine and analyze the most important factors that affect inward foreign
investment in Mauritius and for this purpose; the following model shall be used:
FDI = f (GDP, OPEN, INV, PRO, RER) Equ1
Where FDI is inward foreign Direct Investment, OPEN is openness, PRO is productivity,
RER is Real Exchange Rate, CTAX s the corporate tax rate and INV is Domestic
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