Are the determinants of foreign direct investment the same within the service sector? Evidence from bootstrap based bias corrected fixed effects model

Abstract

Using sectoral as well as subsectoral foreign direct investments (FDI) data, we explore the determinants of FDI in services at both sectoral and sub‐sector levels of 25 emerging economies for the period 1999–2016. We employ a bootstrap‐based bias‐corrected fixed effects model to analyze whether FDI's determinants vary within the service sector. Our results show that market size, market potential, natural resources endowments, and agglomeration effects are positively associated with the FDI in services and its subsectoral levels. The sectoral disaggregated analysis shows that the variables that attract FDI in services do not vary much from financial to nonfinancial services. This study suggests that there is no need for a separate theory for explaining FDI determinants in financial and nonfinancial services though some modifications are to be made. Before making modifications, we have to consider the salient features of service sector FDI, such as intangibility, inseparability, perishability, heterogeneity, and commercial presence.