Importance of Investment Climates for Inflows of Foreign Direct Investment in Developing Countries

Abstract

The changing direction of foreign direct investment towards developing countries has been attracting more attention in recent literature. As one possible source of the changing direction of FDI, the relationship between FDI inflows and some indicators of business friendliness (investment climate) of countries is investigated in this paper. The study covers the years from 2004 to 2013 and mainly focuses on developing countries. The results show that countries with better records of doing business tend to receive more FDI inflows. Improvements in the selected ease of doing business indicators, such as starting a business, protecting investors, and easiness of international trade, have a significant explanatory power in determining higher FDI flows to developing countries.