The Role of Economic Infrastructure and Trade Openness in Attracting Foreign Direct Investment in Developing Countries

Abstract

The purpose of this paper was to examine the role of economic infrastructure and trade openness in attracting foreign direct investment in developing countries. The study used secondary data from 1997 to 2019 to analyse 95 developing countries selected as per data availability. Pooled regression was performed on the panel data using E-views computer software. The method used was fixed effect model and the two-stage estimated generalized least squares estimation with cross-section weights and instrumental variables. The paper tested seven equations for robustness and results analysed after cointegrating regression Durbin-Watson test. The study tested the significance of economic infrastructure and degree of trade openness in the attraction of foreign direct investment inflows among other variables. The study established a positive and significant correlation between foreign direct investment inflows and economic infrastructure. The paper also established a positive and significant correlation between foreign direct investment inflows and the degree of trade openness. The study concluded that better economic infrastructure and increased trade openness individually results in increased foreign direct investment inflows. Unequivocally therefore, this paper showed that countries with good economic infrastructure will drastically reduce transport cost. With good infrastructure in place, increased degree of trade openness will lead to a greater marginal gain in foreign direct investment inflows. Consequently, empirical results showed that, economic infrastructure and trade openness interact. This interaction makes a given developing country more attractive as a foreign direct investment destination. Unambiguously, this study found a negative interaction between economic infrastructure and the degree of trade openness, inferring that the most economically advanced developing countries tend to attract higher foreign direct investment inflows but at a decreasing rate compared to the least economically advanced developing countries.