Determinants of foreign direct investment in BRICS economies: Analysis of economic, institutional and political factor

Abstract

This paper explores the role of economic, institutional and political factors in attracting foreign direct investment (FDI) in BRICS (Brazil, Russia, India, China & South Africa) economy and the comparative weightage of these factors in attracting FDI. The study uses panel data for a period of ten years (2000-2009) in order to examine the significant determinants of FDI in BRICS from a holistic approach. Analysis has been done using panel unit-root test, and multiple regressions. This study takes into account Market Size, Trade openness, natural resources as economic determinants and Macroeconomic Stability (Inflation Rate), Political stability/No violence, Government Effectiveness, Regulatory Quality, Control of corruption, Voice and accountability, Rule of Law as potential institutional and political determinants of FDI. These factors are based on their relative importance from previous empirical literature. Findings indicate that economics factors are more significant than institutional and political Factors in BRICS economies. The results indicate that market size measured by real GDP is a significant determinates of FDI which implies that most of the investment in BRICS is motivated by market-seeking purpose. Analysis of empirical data also indicates that trade openness, natural resource availability, rule of law and voice and accountability are statistically significant. Coefficients of market size, trade openness are positive which implies that these variables have positive effect on total inward FDI. Natural resource availability has negative effect on total inward FDI, this particular result indicate that FDI is not motivated by resource-seeking purpose in BRICS economies.