The determinants of foreign private investment in developing countries

As a country develops, its need for capital increases. Capital the country cannot generate internally must be provided by outside sources. Early in its development, the country relies on the public sector to provide capital, but as the economy grows so does the private sector, which has its own demand for capital. Again, capital that cannot be generated internally has to come from the outside.; In the latter half of the 20th century much of the external capital flowing into developing countries has been in the form of foreign direct investment (fdi). In the last two decades, however, fdi in developing countries has been accompanied by foreign portfolio investment (fpi). FPI is not made to acquire ownership or control of a firm, but instead to secure for its owners some form of gain. Both fdi and fpi have been growing dramatically in the last fifteen years, but have been concentrated in a small number of countries. Further, the increasing sophistication of financial markets and the increasing complexity of inter-firm capital transactions beyond traditional fdi and fpi makes it possible for capital transactions of one kind to have the appearance and function of the other; hence, the line between fdi and fpi is becoming blurred.; The literature on fdi and fpi tends to view them as distinct, each responding to its own set of determining factors. This study argues, however, that it is possible to view fdi and fpi as complementary forms of investment that are subject to a common set of determining factors. The study shows how fdi and fpi in developing countries have grown since 1972 and demonstrates that the use of fpi for development has historical precedents in the 19 th century US. It identifies six countries to which a significant amount of fdi and fpi have gone, and develops a set of measurable variables from which similarities in determining factors can be found. Using time series regression techniques on data from 1980 to 1995, the study found that a significant degree of commonality exists between the determinants of fdi and fpi.