The determinants of FDI in Mauritius: a dynamic time series investigation

Purpose – The purpose of this paper is to supplement the literature on the determinants of foreign direct investment (FDI) by bringing new evidences for the case of a successful FDI recipient country in Africa, namely Mauritius. Design/methodology/approach – The determinants of FDI are examined by specifying a reduced‐form specification for a demand for inward direct investment function, and by making use of a dynamic framework. In the absence of cointegration, a differenced vector autoregressive (DVAR) model is used to capture the short‐run dynamics of the growth rate of the different specified variables. Findings – The most instrumental factors appear to be trade openness, wages and the quality of labour in the country. Size of the market is reported to have a relatively lesser impact on FDI, probably related to the limited size of the population and the domestic market on the one hand and the good export opportunities from Mauritius on the other. The significant coefficient of the lagged dependent variable suggests the presence of dynamism in the system. Research limitations/implications – The paper is based mainly on the case study of a single country and therefore, imposes limitations on the generalizability of some of the findings to the region. As such, availability of a longer time series would have been better. Practical implications – Research findings suggest that in addition to giving fiscal investment incentives, the government should also ensure that labour costs remain competitive and do not increase relatively faster than other FDI recipient countries. Moreover, the state should realize that labour cost alone is not a stand‐alone ingredient and that productivity of workers remains a big challenge. As such, adoption of appropriate but prudent measures in further opening up of the economy to international trade remains an interesting avenue given the limited potential for foreign direct investors. Originality/value – An overwhelming number of studies have focused on samples of developed countries with relatively very few works conducted on the determinants of FDI to Africa. This paper attempts to supplement the related literature and additionally uses rigorous time series analysis to model the dynamism in FDI modelling, an element largely ignored by past studies.