Drivers of genuine FDI inflows in advanced economies

• Published in: The Quarterly review of economics and finance 2022-05, Vol.84, p.407-419
• Main Authors: Dellis, Konstantinos, Sondermann, David, Vansteenkiste, Isabel
• Format: Article
• Language: English
• Subjects: Advanced economies; Economic structures; Foreign direct investment; Institutions
• ISSN: 1062-9769; 1878-4259
• DOI: 10.1016/j.qref.2020.09.004

•If not corrected for, SPEs distort the estimation of the determinants of FDI.•Given the increasing relevance of SPEs, it is important to get the data right.•The quality of institutions also matters for attracting FDI in advanced economies. In this paper we empirically investigate the drivers of genuine FDI inflows in advanced economies for the period 1985–2018. Our contribution to the existing literature is two-fold. First, we use newly available data of genuine FDI flows analysing the role of statistical artefacts, such as special purpose entities and financial round-tripping in headline FDI data. Second, we augment the traditional analysis on the drivers of FDI inflows in advanced economies by considering a range of potential factors which are under the policy makers’ control, i.e. measures that proxy for a country's quality of economic structures. Our results show that it is important to get the data right. In particular, more recently, total FDI data became increasingly distorted thus prompting misspecifications if not cleaned beforehand. Moreover, we suggest that there is a significant empirical relation between the quality of a host country's economic structures and FDI inflows. Our findings are robust to various economic specifications.