1. Introduction
The article “Determinants of Foreign Direct Investments in Emerging Economies: Evidence from Europe, Middle East and Africa” aims to analyze the factors that influence foreign direct investment (FDI) in emerging economies in Europe, the Middle East, and Africa. The study begins with an introduction that provides background information and outlines the research objectives and methodology. The literature review section examines the definition of FDIs and their importance in emerging economies, as well as previous studies on the determinants of FDIs. The article then explores various economic factors that can affect FDI, including GDP growth rate, inflation rate, exchange rate, and trade openness. It also considers political factors such as political stability, government policies, and corruption level. Institutional factors, such as the legal framework for foreign investments, intellectual property rights protection, and ease of doing business, are discussed next. The analysis also highlights market factors, including market size, market potential, and consumer behavior. Infrastructure factors, including transportation, communication, and energy infrastructure, are also examined. The article also considers human capital factors, including education level, skilled labor availability, and workforce productivity. Several case studies are included to provide real-world examples of the determinants of FDIs in different countries. Finally, the conclusion section summarizes the findings of the study, discusses implications for policymakers, and suggests areas for future research.
1.1. Background
Introduction “Determinants of Foreign Direct Investments in Emerging Economies: Evidence from Europe, Middle East and Africa” by Bartu Soral, Bulem Laçiner and Sezin Yildirim aims to analyze the factors that influence foreign direct investment (FDI) in emerging economies in Europe, the Middle East and Africa. The study, conducted in 2009, is based on previous literature and quantitative analysis. The first part of the analysis concentrates on the investments in Europe; then the study transforms into analysis of an emerging area, Middle East; and finally, the research conducts in the context of investments in Africa. The data has been gathered using Bloomberg and World Bank statistics and SPSS and STATA software are used for the analysis. The main objective of the study is to find out the significant factors that affect FDI in those regions and to test whether the theories in the literature are valid for those regions. Moreover, this paper not only provides evidence for the relevance of the existing theories in those areas but also creates a newer ground for the research on the literature. The article then explores various economic factors that can affect FDI, including GDP growth rate, inflation rate, exchange rate and trade openness. It also considers political factors such as political stability, government policies and corruption level. Institutional factors, such as the legal framework for foreign investments, intellectual property rights protection and ease of doing business, are discussed next. The analysis also highlights market factors, including market size, market potential and consumer behavior. Infrastructure factors, including transportation, communication and energy infrastructure, are also examined. Furthermore, the human capital factors, which are believed to be more effective nowadays according to Malik et al., including education level, skilled labor availability and workforce productivity are integrated into the analysis. Several case studies are included to give a chance to provide real world examples of the determinants of FDIs in different countries. Finally, the conclusion section tries to give some implications of the research. The authors suggest that the countries should improve their higher education systems and infrastructure facilities, especially in Africa. Econometric results with detailed evaluation are presented in the paper.
1.2. Research Objectives
The key research objective of this paper is to empirically examine and measure the impact of different kinds of factors on the foreign direct investment decisions in the selected emerging economies. Firstly, analyzing the macroeconomic factors, this research will attempt to bring some empirical evidence regarding the impact of market size, market growth, exchange rate and host country’s economic growth on the level of foreign direct investment attracted by each of the selected countries. Secondly, considering the economic and political liberalization of the former socialist Central and Eastern European countries (CEECs) and Commonwealth of Independent States (CIS), and the introduction of political and economic reform measures, such as privatization and positive shift of attitude towards the foreign capital, it is important to provide some empirical evidence as to how these host country’s policy changes may influence foreign investment behavior. Lastly, the impact of institutional development in the post-transformation period will be considered. It is widely agreed that a developed institutional environment is essential for successful and sustainable economic development. However, it remains uncertain in the literature as to whether institutional factors do impact on the foreign firms’ investment decisions. Therefore, this study will examine the relative importance of different kinds of institutions, ranging from market supporting institutions, such as the protection of private property rights, to transformative institutions, such as the establishment of political and economic stability, measured by a variety of different indicators. The expected outcome is that this research will shed some light on the understanding of the changes of patterns of foreign direct investment in transition economies after the start of their transformation, and how these changes can be explained by different kind of factors that affect the location choice of foreign firms. This shall also provide policy-makers with a clearer interpretation of the structure of the FDI decisions, and therefore ease the concern from a potential ‘race to the bottom’ between countries in offering various kind of government incentives to attract foreign capital.
1.3. Methodology
The sample consists of 7,077 non-financial firms from Europe, Middle East and Africa over the period 2012-2018. A number of important variables have been determined as suitable for this study. With regard to the dependent variable – foreign direct investments (FDI) – since the amount of such investments may be influenced by the size of the country, we followed the literature and hence we used net inflows of foreign direct investment as a percentage of GDP. As for the determinants of FDI, in this study several independent variables, both economic and non-economic, have been selected based on the existing literature. We believe that they capture the fundamental and specific drivers of FDI across various countries. For instance, GDP growth, inflation, exchange rate and trade openness level have been used as the determinants of FDI. Those variables possess ecological rationality as Gross Domestic Product depicts the size of the economy; inflation rate demonstrates the real exchange and purchasing power of the society’s monetary unit, and trade openness expressed through the ratio of the country’s total trade – the sum of exports and imports – to the GDP. Also due to their significant impact on inward investments, both market size and employment rate variables were considered. Nearly all of the big players in FDI arena, such as developing countries in Eastern Europe and major destinations like Russia and Turkey, have been included in the sample. Nevertheless, in order to avoid similarity between the countries and findings that are specific only to certain states, another variable – the number of segments in the dataset. This allows to reflect various data clusters in the sample and hence ensures robustness of the regression results. With a view to capturing ‘good governance’ criteria, a composite Corruption Perception Index scale, including measures of public sector corruption, has been used as a proxy of country’s overall corruption environment. Substantial foreign capital may flow into the economies where political risks are low. Hence the Political Stability and Absence of Violence and Terrorism Index variable was considered. This index is based on political risk and study of the absence of violence or terrorism on a yearly basis. Much progress has been made on reducing global poverty and sustaining development in the poorest countries. Therefore, the United Nations and its member states have established the Sustainable Development Goals mainly aiming to end poverty, protect the planet and ensure prosperity for everyone. Every goal is interconnected and has to reach through individual specific targets that are quantified. FDI has a considerable importance for most of the emerging economies which try to achieve these objectives and become an attractive source of foreign investments. However, it was concluded that there is no general solution to the question of which factor is the most significant because it is largely depending on industry and company specific ones. On the other hand, significant macroeconomics drivers reveal that “one-size-advises does not fit to all countries”. Finally, with an advanced knowledge in economics, the state and the way how foreign capital may change strategies for development can be better understood.