Determinants of FDI and portfolio flows to developing countries: A panel cointegration analysis

Using a panel of thirty-two developing countries over the period 1990-2004, we examine the relative significance of key economic determinants of foreign direct investment (FDI) and portfolio flows. Our model is estimated using a variety of recently developed panel data techniques that account for individual and time effects, potential heterogeneity across individual members of the panel, integration and cointegration properties, endogeneity and serial correlation. The results indicate that while for FDI flows to developing countries domestic productivity growth is the dominant determinant, for portfolio flows, domestic money growth is the major 'pull factor'.