The Determinants of Foreign Direct Investment Inflows: The Case of Emerging Countries

Abstract The purpose of this study is to analyse the impacts and causal associations of the digital economy, productivity, corruption, and innovation capacity on foreign direct investment (FDI) in emerging countries. A panel dataset that included 24 emerging countries from 2000 to 2020 was used in the study. The heterogeneous panel cointegration test determines the short- and long-run dynamics between the variables, which is highlighted for empirical analysis. The application of principal component analysis (PCA) in this study results in the creation of a digital economy index that contributes to the existing empirical literature and provides a more comprehensive representation. The empirical evidence indicates that overall productivity has a positive impact on FDI flow in the long run, whereas corruption has negatively impacted FDI in the short term. The FDI flows are positively impacted by the digital economy in the short term, but innovation capacity is not a significant factor in FDI. Policymakers can benefit from valuable insights from the research, which can assist them in leveraging productivity and the digital economy to positively impact FDI inflows.