The Determinants and Impacts of Foreign Direct Investment

Some theories on the determinants and impacts of Foreign Direct Investment (FDI) are presented and critically discussed. In the empirical investigations which follow this, the effects of some macroeconomic variables such as economic growth, market size, degree of openness, real effective exchange rate, and labor cost on flows of FDI into the USA have been tested. In the specification of the econometric model, account has been taken of the fact that economic growth could be both a determinant and impact of FDI inflows. The main finding is that economic growth in the USA does not explain the long-run behavior of the FDI inflows equation. It can explain its short run behavior but not significantly. Besides, it has been found that FDI inflows contribute to economic growth in the USA. Open-market operations have been proposed as economic policy to attract FDI flows.