New Delhi: Foreign direct investment (FDI) is an important ingredient for economic growth, especially for emerging economies. Governments in these economies strive hard to create conducive conditions to attract more FDI, but what exactly are these conditions?

A new study by Simplice Asongu and others of the African Governance and Development Institute showed that the key conditions include market size, infrastructure availability, and trade openness. The authors analyzed FDI inflows into nine countries (Brazil, Russia, India, China, South Africa, Mexico, Indonesia, Nigeria and Turkey) between 2001 and 2011.

These countries attracted considerable FDI during that period and now comprise a significant portion of global FDI flows. This happened partly because of their large market size—a critical determinant for FDI. According to the authors, a $1 billion increase in the GDPs of these economies resulted in $56 million increase in FDI inflows. Another important determinant is infrastructure which reduces the cost of business transactions and encourages investment. The authors show that for every unit increase in the number of mobile phone users (per 100 people), FDI inflows increased by $156 million.

Finally, the authors show that economies more open to trade attract more FDI. The authors also identify factors that do not seem to influence FDI. The level of natural resources, quality of institutions, and inflation in an economy all had insignificant effects on FDI inflows in the nine countries.

To sustain FDI inflows and attract more FDI, the authors recommend that governments, and especially the Indian government, invest in infrastructure and human capital. A more skilled workforce will be able to absorb technology spillovers from FDI and generate long-term economic growth, according to the authors.

Also read: Determinants of foreign direct investment in fast-growing economies: evidence from the BRICS and MINT countries.

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