Foreign Direct Investment in Developing Asia According to the Location Advantage Hypothesis

Abstract

This paper investigates the location factors of Foreign Direct Investment (FDI) flows across Asian developing countries. The dataset covers ten selected developing countries in Asia using yearly data over the period from 1975 through 2009. The Hausman's specification test is conducted to compare results of fixed effects to random effects. Panel unit root tests confirm that all variables are stationary at their given levels. Results indicate that location determinants of FDI are important in attracting FDI flows for Asian developing countries. Our findings show that the main determinants of FDI for developing countries in Asia include market size, infrastructure development, trade openness, financial deepening, GDP growth, economic development, and human capital. Estimates are robust in the different econometric specifications and show that FDI flows into Asian developing countries are encouraged through economic size, financial deepening, development in infrastructure, trade openness, GDP growth, economic development, and human capital.