Home market determinants of FDI outflows from developing and transition economies

Outward foreign direct investments (FDI) from developing countries and transition economies have picked up in the last decade. This study examines the home country factors that determine the outward foreign investments from 65 developing and transition countries in the period 2000-2006. The main hypothesis tested is that the small market size, trade conditions, costs of production and local business conditions are the main drivers of outward FDI. In order to examine the effects of these factors, the fixed effects estimation technique is employed using variables that measure income, trade, infrastructure, labour market conditions and economic stability. Proxies for the institutional environment such as bureacracy, corruption, investment risk are also used to reflect both the political and economic push factors on FDI. The preliminary findings reveal that outward FDI from developing countries increases with foreign competition in the domestic market augmented by inward FDI. As government stability, investment profile and bureaucracy quality in the home country improves, outflows of capital decreases. In other words, developing country transnational corporations are formed as a result of escape response from the economic and political conditions in the home countries.