The Influence of Determinant Factors on Foreign Direct Investments

Introduction

The financial markets have evolved into a more integrated framework, globally, because of increasing liberalization of exchange controls and market access. This integration, enhanced by increased competition among market players, has led to the introduction of new financial instruments with wide market access and lower transaction costs, therefore attracting investors of numerous nationalities and countries (economies).

Foreign Direct Investment (FDI) is a key element in this rapidly evolving international economic integration, also referred to as globalization. FDI provides a means for creating stable linkages that serve as bridges across economies. In addition, under the appropriate circumstances, FDI may represent the impetus for the host economy to extensively promote its products to international markets. Therefore, besides the positive effects on the development of international trade, FDI is an important source of capital for several economies. The FDI contains many management dimensions, such as bonds, portfolio investment in foreign stocks (Xinxin et al., 2021).

Today, the world is struggling through major challenges and a new reality, which we must face; to this end, the present study could provide a distinct standpoint by means which to consider from a different perspective the dependence of macroeconomic indicators against FDI and the facets that could add a beneficial impact on both the economic and social life. Firstly, foreign direct investments have a vast history, being regarded as essential to economic development. Secondly, they represent a distinctive method for connection to the economic system, including periods during which the economy comes up against difficulties.

The paper aims both to analyze and interpret the determinants of foreign direct investment, by conducting an analysis on the actual member countries of the European Union over the period 2005-2019.

As regards the objectives of this paper, they are: to acquire more in-depth theoretical concepts related to FDI; to establish the determinants of FDI; to conduct the proper analysis of the determinants; to determine the impact produced; to carry out the linear regression model in order to determine the relevance of the analysis and the determinants; to determine the most pertinent determinants and their correlation with FDI.

The topicality of the subject is denoted by the fact that FDI was and remains to be an important aspect of both social and economic life. The concept of FDI has gradually replaced the traditional forms of capital investment, and today, the concept refers to the contribution brought about by the association of foreign part with a state would bring to the economy. In addition, FDI has adapted at the same time both to detrimental contexts and to financing needs. Furthermore, FDI plays the role of accelerators for other traditional manufacturing indicators, i.e., both for human and natural resources, including science, technology, or even knowledge itself. FDI has a huge potential given that it can channel and enhance the local environment, at the level of all economies, regardless of whether they are less developed economies, in transition, or even developed economies.

This study intends to answer the question, “What are the determinants that attract FDI to european countries?”

The paper will consist of three parts:

• 1.

  The role and importance of FDI. Theories related to FDI. In this part, the theoretical aspects of paramount importance will be provided through scholarly literature, complemented by the role and importance of FDI in the world economy.

• 2.

  The evolution of FDI in the member countries of the EU. This part will cover the evolution of FDI in each EU member state.

• 3.

  The Determinants of FDI. Case study on the influence of determinant factors on foreign direct investment. Given that FDI is significant in terms of economic growth and represents an important feature of the economy, the authors have decided to analyze, through this paper, the factors that could influence FDI. The selected factors are Trade Freedom Index, Economic Freedom, Trade Balance, Exports and Imports, Governmental Debt, Fiscal Freedom Index, Financial Freedom Index, Inflation, Unemployment rate, and Labor Freedom Index. The analysis will be performed on the member countries of the European Union and the sample period is 2005-2019.