The Effect of Foreign Direct Investment on the Economic Development of Mongolia

The Effect of Foreign Direct Investment on the Economic Development of Mongolia

Erdenebat Mungunzul, Taikoo Chang
DOI: 10.4018/978-1-7998-2448-0.ch044
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This article describes how foreign direct investment in Mongolia has reached 3.9 billion US$ mainly in the mining sector that amounted approximately 40% of the year's GDP. Even though FDI into Mongolia has been grown along with the country's economic development with trade openness to the world, a few studies have used regression analysis to analyze determinant factors of FDI. This article has estimated the determinants attracting FDI inflow into Mongolia by using two methods: applying single country (Mongolia) data using the determinants attracting FDI inflow into Mongolia from 1995-2014, and applying the determinants attracting FDI from the top investment countries using panel data, using random and fixed effects models from 2005-2013. The study results showed that GDP of Mongolia has a positive and significant effect on the FDI inflow. It was also revealed that the partner countries located either too far away from or too close to Mongolia pay little attention to and play a small investment role in Mongolian FDI.
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1. Introduction

Foreign direct investment is generally seemed as a way through which technology can spread from developed countries to developing ones. Although the evidence of relationship of foreign direct investment(FDI) with economic growth is not clear, several studies agree that absorptive capacity of host country does an important role of explaining FDI. For instance, it is stated that FDI is positively related and significant only for higher income countries and has no impact in lower income countries. And it is asserted that contribution of FDI for economic growth is determined by its interaction to the human capital level in host country. Mungunzul and Chang (2016) showed that FDI does a different role in growth procedure because of differing trade policy regimes. Even though there are different shapes of overseas capital flows, FDI has been research topics. FDI is an investment done abroad through establishing a new company in host country or through acquiring shares to have full managerial power of existing foreign company.

This paper’s goal is to determine the factors affecting the FDI flows into Mongolia through answering the following questions: Firstly, how FDI influences on economic development of Mongolia. Secondly, which factors can be identified with regard to FDI. Thirdly, what recommendations could be applied to induce FDI flows into the country.

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