Current research indicates that for many developing countries, Foreign Direct Investment (FDI) inflows provide a major source of external financing, capital and technology transfer from developed countries. The Dominican Republic received $34.9 tn of FDI between 1993 and 2012. The objective of this paper is to understand the drivers of inward FDI into the Dominican Republic. The empirical analysis reveals that market size, infrastructure, trade openness, natural resource extraction, secondary education and labor force participation rate are statistically significant factors in attracting FDI inflows. Policy recommendations include increasing the reliability of electricity supply, outward-oriented trade policies, and investments in infrastructure, transportation networks, communication as well as education at the secondary level. Other recommendations include a more friendly business environment with increased credit availability, low inflation and controlled debt. Channeling FDI into sectors with high value-added outputs will improve the standard of living in the Dominican Republic.

Foreign Direct Investment (FDI), which is defined as capital inflows from other countries investing in the host economy, plays an essential role in the progress of the economies of developing countries, including the Dominican Republic. The presence of FDI in the Dominican Republic can be traced back to the 1890s, when foreign investors invested in agricultural products such as sugar, coffee and tobacco to export to the developing world (UNCTAD, 2009). FDI started to play an even more important role in the economy when the Dominican Republic embraced the neo-liberal rhetoric of the 1980s, which emphasized free trade and the privatization of state enterprises. Prior to this, Dominican Republic’s economy was heavily dependent on the agricultural sector. Over the past three decades, the Dominican Republic’s economy has transformed from an agriculture-based economy to an economy more reliant on the manufacturing and services sectors, largely due to the change in the composition of FDI inflows by sector. Even though FDI in the Dominican Republic today is directed towards manufacturing and services as opposed to agriculture, FDI inflows continue to serve as the driving force of the Dominican Republic’s economy.

According to the US Department of State (2013), “the Dominican government has made a concerted effort to attract new investments, taking advantage of the new foreign investment law and of the country’s natural and human resources. The decision to privatize or ‘capitalize’ ailing state enterprises (electricity, airport management and sugar) has attracted substantial foreign capital to these sectors.” Most of the Least Developed Countries (LDC) have been skeptical of FDI in the past. While the benefits to multinational corporations seeking inputs such as natural resources and cheap labor, large domestic markets for their products, and stronger links to the global market seem obvious (Athukorala, 2009), many developing countries have not fully recognized the benefits of FDI inflows to the host country. The World Bank data shows that the amount of income payments made from FDI in the Dominican Republic in the form of income on equity (dividends, branch profits, and reinvested earnings) and income on the intercompany debt (interest) was $1,839.4 mn in 2012.

Applied Economics Journal, Foreign Direct Investment (FDI), Least Developed Countries (LDC), Free Trade Zones (FTZ), Dominican Republic-Central America Free Trade Agreement (DR-CAFTA), Determinants, FDI Inflows, Dominican Republic.