Investment Climate and FDI in Developing Countries: Firm-Level Evidence

SummaryThis paper uses firm-level data across 77 developing countries to show that constraints related to investment climate hamper Foreign Direct Investment (FDI). The main results show that physical infrastructure problems, financing constraints, and institutional problems discourage FDI. These results are robust to an alternative definition of FDI, introduction of additional explanatory variables, and some breakdown analyses (different sectors of activity and comparison between Sub-Saharan Africa and other developing countries). The results also highlight that exporter foreign firms are more constrained in their activity by physical infrastructure hurdles and the lack of skilled workers compared to firms supplying the domestic market.