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The IUP Journal of Applied Finance
Inward Foreign Direct Investment and Economic Development of Developed Countries: Panel Regression Approach
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The economic basis of globalization lies in multilateralism. The intended impact of globalization is global allocative efficiency because Foreign Direct Investment (FDI) spearheads the dispersal of capital across the globe. So, it can be said about FDI that multilateralism implies importing capital from a variety of sources as may be most efficient rather than restricting them to a bilateral basis. This forms the motivation of this paper. This paper has used Principal Component Analysis (PCA) and panel regression approaches. The study builds up a methodology for measuring and testing the determinants of the patterns of inward FDI of developed countries. These determinants are a large set of developmental variables. The study evolves a set of six composite indices by using PCA, namely, human resource, infrastructure, labor, market, trade openness and resource. The annual growth rate is 11% while that of the top 10 developed countries of the world experience a significantly lower growth rate, i.e., 3.4% (= 0.111 0.077). Infrastructure is highly elastic at 1.72. In the case of the top 10 countries, the determinants of inward FDI that are significant and positive are labor, market and resource.

 
 
 

Globalization can be summarized as opening up of markets, leading to transfer of capital, technology and people. However, another important dimension of globalization is multilateralism. It would be obvious that the former cannot be effective without the latter. One of the major objectives of international economic reforms was to encourage multilateralism. The intended impact of globalization is global allocative efficiency because Foreign Direct Investment (FDI) spearheads the dispersal of capital across the globe. So, it can be said about FDI that multilateralism implies importing capital from a variety of sources as may be most efficient rather than restricting them to a bilateral basis. This forms the motivation of this paper.

FDI theory implies that (home) economies are able to export capital to the most efficient destinations (host countries). In an analogous manner, it can be said about inward FDI that multilateralism implies importing capital from a variety of sources as may be most efficient rather than restricting to a bilateral basis. Similarly, the obverse of this phenomenon would be to export capital where it can be most efficiently utilized by combining capital with other resources optimally.

 
 
 

Applied Finance Journal, Foreign Direct Investment, Foreign Direct Investment (FDI), Principal Component Analysis (PCA), Economic Development, Developed Countries, Panel Regression Approach.