An Examination of Economic Liberalization Impact on Foreign Direct Investment in Selected Developing Countries

According to literature, Economic liberalization is an important factor affecting foreign direct investment. Experience of developing countries resorting to liberalization policies also indicates that they absorb considerable foreign direct investment. Purpose of this paper is to examine the hypothesis which is "economic liberalization has a positive effect on foreign direct investment" as well as other major factors determining it. For this, we have pooled data for the developing countries during time period 1995-2004. The obtained results indicate that economic liberalization has a positive and significant effect on the foreign direct investment, while inflation has a negative and significant effect and both of them seem to be robust. Based the results obtained, if developing countries attempt to attract foreign direct investment, it should be more efficient to focus on economic liberalization and develop their infrastructure rather than just reducing wage. Also, regarding negative and significant effect of inflation on foreign direct investment, these countries should provide a stable environment to facilitate inflow of foreign direct investment.