Inflows of foreign direct investment spur growth in the receiving country and cause positive spillovers of technology and skill throughout the entire economy. FDI comes from source countries that can be broadly classified as traditional and nontraditional investors. Traditional refers to wealthy and developed economies, while nontraditional refers to emerging economies in the process of developing. The overarching hypothesis is that nontraditional source countries are less risk-averse than their wealthier counterparts. This is believed to be the case because multinational enterprises located in these regions are familiar with political and economic uncertainties at home; therefore, less than satisfactory investment conditions in the host economy abroad do not deter their interest. If FDI is originating in a more diverse set of source countries, does this mean receiving nations have more opportunities to attract FDI and subsequently experience positive growth? We test how the two source country types respond to different elements of risk using a random effects generalized least squares regression. Our main empirical findings support that political instability indeed does not deter FDI flows originating in nontraditional source countries, however quality of transport and trade-related infrastructure within the receiving economy does determine FDI flows from both source country types. Overall, we strongly emphasize that a blanket generalization concerning investment behavior between different types of source countries cannot be made, and encourage more research to be done in this relatively new field of study.
Colorado College Honor Code upheld.
Includes bibliographical references.
Colorado College Honor Code upheld.
