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An analysis of net FDI drivers in BRIC countries

SAID ELFAKHANI (Suliman S. Olayan School of Business, American University of Beirut, Beirut, Lebanon)
Wayne Mackie (Saginaw Valley State University University Center, MI)

Competitiveness Review

ISSN: 1059-5422

Article publication date: 19 January 2015




The purpose of this study is to identify the main drivers which can explain the relative success of BRIC countries (i.e. Brazil, Russia, India and China), collectively and individually, in attracting foreign direct investment (FDIs). Unlike previous studies that have identified gross domestic product (GDP) as a major determinant, we find that for the sampling period 1980-2008, social variables (namely, high population growth and educated labor) and political variables account for 40 and 7 per cent of the variance in net inward FDI, respectively, and no importance for economic variables. Interestingly, for a sub-period (1999-2008), we observe the salience of financial (namely, sizable GDP economy, favorable net trade balance and controlled currency risk and sovereign debt risk) determinants of inward FDI (R2 is 44 per cent). On the other hand, when testing individual countries, it seems that FDI determinants are not universal as each country enjoys different characteristics and sources of strengths that attract FDIs. The implication is to focus more on those incentives that the host country is weak in to be able to optimize the amount of FDI flowing in from foreign investors.


Three blocks of variables were examined: economic/financial, social and political variables. The economic/financial variable set expands on a prototype developed by Dunning (1981), which distinguishes three types of influences on inward FDI. First, it suggests some domestic market characteristics to influence FDI. They include the market size and the direction of trade flows. Another set of economic/financial factors includes measure of the host country’s overall financial performance such as the inflation rate and the effectiveness of the service sector. Social factors of the host country are considered an important determinant of FDI. Our social model included: the degree of human capital development, the extent of urbanization, the quality of life and the adequacy of the health-care system. Political factors were also considered. Using the STATA statistical package, we run a regression analysis on our transformed data twice: once over the full sampling period (1980-2008), and a second time using a partial data set covering the past 10 years (1999-2008), after controlling for multicollinearity and other econometric problems.


Regressing net FDI inflows on all financial, social and political variables during the full data series (1980-2008), and after controlling for severe econometric problems, the nested block regression concludes that the social variables account for 40 per cent of the change in net inward FDI, followed by political variables (7 per cent). The nested regression for the past 10-year data series (1999-2008), however, shows the economic/financial variables block and social variables blocks contribute the most to FDI variations (R2 is 44 and 7 per cent, respectively), while political variables appear insignificant. The findings for each individual country show that the four countries have few common determinants.

Research limitations/implications

Our results are not without limitations. Our sample is limited to BRIC countries that had attracted significant FDIs in the past two decades. Testing for a larger set of countries with smaller or less attractive countries included could be useful before any final conclusions can be drawn. Also, this research can be extended to cover the busted 2008-2010 years. It would be interesting if our results still hold in recent down market conditions. For example, in early 2008, there was a big credit crisis in the USA, followed by a universal market crash in September and October due to large financial institutions collapsing, which resulted in the recent bubble explosion. More recently, we witnessed the European financial crisis beginning with the Greece debt default (followed by fears in Spain, Portugal and potentially others).

Practical implications

Overall, our findings suggest that individual countries enjoy different levels of strengths in economic/financial, social and political variables. A country that strives to attract more inward FDI may consider focusing more on those unique country-specific incentives that it is weak in to be able to optimize its intake of FDIs.


The main goal of our paper is to bring updated evidence on the relevant set of incentives which have made the BRIC block the penchant for FDI, and whether these incentives are the same for each of the BRIC countries. Our paper makes three major contributions. First, it expands Mathur and Singh’s (2007) set of explanatory variables, especially to reflect the effect of financial markets and economic conditions (such as currency exchange rate risk, level of real interest rate, size of national debt, sovereign credit rating risk and inflation), new social variables (such as life expectancy at birth, people receptivity to foreign investors and the number of graduate degree holders) and new political variables (host country’s level of restriction on capital repatriation). Second, it brings more updated evidence by using a longer sampling period (1980-2008). Third, we test BRIC as a group and we retest individual BRIC countries. We also ensure that our results are free from econometric (autocorrelation and heteroskedasticity) problems.



ELFAKHANI, S. and Mackie, W. (2015), "An analysis of net FDI drivers in BRIC countries", Competitiveness Review, Vol. 25 No. 1, pp. 98-132.



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