An Examination of Economic Liberalization Impact on Foreign Direct Investment in Selected Developing Countries

Foreign direct investment (FDI) is considered as an instrument for overcoming capital shortage problem as well as a suitable way for accessing modern technologies. Thus, recognizing determinant factors of foreign direct investment is important for its absorbing. According to literature, Economic liberalization is an important factor affecting FDI. Experience of developing countries resorting to liberalization policies also indicates that they absorb considerable FDI. Purpose of this paper is to examine the hypothesis which is “economic liberalization has a positive effect on FDI” as well as other major factors determining FDI. For this, we have pooled data for the developing countries during time period 1995-2004. The obtained results indicate that economic liberalization has a positive and significant effect on the FDI, while inflation has a negative and significant effect and both of them seem to be robust. Based the results obtained, if developing countries attempt to attract FDI, it should be more efficient to focus on economic liberalization and to develop their infrastructure rather than just reducing wages. Also, regarding negative and significant effect of inflation on FDI, these countries should provide a stable environment to facilitate inflow of foreign direct investment.