impact of government policies and investment agreements on fdi ...

The results for the determinants <strong>of</strong> FDI from developed <strong>and</strong> developing countries
are reported in Table 9. Focussing first on only the fundamentals <strong>of</strong> the economy as the
determinants <strong>of</strong> FDI from developed countries (FDIDC) <strong>and</strong> FDI from developing
countries (FDIDGC), we find that though economic fundamentals are significant
determinants <strong>of</strong> FDI from both developed <strong>and</strong> developing countries but the importance <strong>of</strong>
the variables differ between the two groups.
Large market size is found to be an important determinant for FDI from
developed as well as developing countries. Apart from the market variables, what attract
FDI from developed countries are higher education levels, better transport <strong>and</strong>
communication <strong>and</strong> lower domestic lending rates in the host countries. But, we find that
cost factors are more important determinants for FDI from developing countries e.g., it is
not the availability <strong>of</strong> skilled labour (in terms <strong>of</strong> higher secondary enrollment rate or
higher labour productivity) but lower cost <strong>of</strong> labour along with undervalued exchange
rates that are significant determinants. Lower cost <strong>of</strong> capital, in terms <strong>of</strong> lower lending
rate, attracts FDI from both developed <strong>and</strong> developing countries. But low capital cost
may lead to higher <strong>investment</strong>s <strong>and</strong> consumption <strong>and</strong> therefore larger markets. Although
transport <strong>and</strong> communication is important determinant for FDI from both developed <strong>and</strong>
developing countries we find that lower budget deficit is more important for FDI from
developing countries.
On the whole, the results indicate that cost factors play a more dominant role in
attracting FDI from developing countries <strong>and</strong> therefore FDI from developing countries
can be explained better by the internalisation theory that explains FDI to be based on
lowering <strong>of</strong> international cost <strong>of</strong> production. However, large market size, availability <strong>of</strong>
infrastructure <strong>and</strong> skilled labour in the host country attracts FDI from developed countries
therefore locational advantages explains better the cross-country pattern <strong>of</strong> FDI from
developed countries.
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