Openness, Investment Climate, and FDI in Developing Countries


  • The authors would like to thank an anonymous referee as well as L. Achy, M. Lahouel, M. Nabli, A. Varoudakis and participants to the conferences of the World Bank ABCDE-Europe (Brussels, 2004) and the FEMISE (Marseilles, 2003) for very helpful comments. The authors acknowledge financial support from the World Bank and the FEMISE network. The views expressed in this paper are those of the authors, not of their institutions.

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The paper assesses the importance of openness, infrastructure availability, and sound economic and political conditions in increasing developing countries' attractiveness with respect to FDI. The results show that these factors are particularly important for South Asia, Africa, and the Middle East. The paper also shows a higher impact of these factors on FDI in the manufacturing sector than on total FDI. The message to developing countries' policymakers is twofold. First, efforts towards openness should be initiated or further increased in order to make their economies attractive to foreign investors. Second, improvements in other aspects of the investment climate are important complements to openness and result in additional and sensitive increases in FDI inflows.