STATE CAPACITY AND NATURAL RESOURCES AS DETERMINANTS OF FDI INFLOWS IN DEVELOPING COUNTRIES

Abstract

The increasing significance of foreign direct investment (FDI) as a source of capital for countries globally is widely acknowledged. FDI, which brings foreign currency, capital, and technology to host nations, has been recognized as a catalyst for competition and market access at the international level. As such, developing nations may leverage FDI inflows to stimulate economic growth by investing in priority sectors, particularly in instances where the demand for investment outstrips domestic savings. The volume of FDI inflows into developing countries has steadily risen from 2007 to 2018, exceeding the amounts received by advanced and emerging economies in 2019. Given that many developing nations lack democratic political regimes, which have traditionally influenced investment attractiveness, it is appropriate to explore alternative explanations. One potential factor is the level of state capacity in developing countries, which encompasses fiscal and legal capacities that do not always correlate with a country's level of democracy. This study challenges the notion of the significant effect of regime type and investigates the relationship between FDI, state capacity, and natural resources. The findings suggest that (a) regulatory quality is significant predictor of FDI inflows in developing countries, and (b) the impact of state capacity and its individual dimensions varies depending on whether a country has limited or extensive access to natural resources.