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The Determinants of FDI in Landlocked Developing Countries in Central Asia

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Trade Logistics in Landlocked and Resource Cursed Asian Countries

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Abstract

This study aims to define why mineral-resource-rich landlocked developing countries (LLDCs) in Central Asia are less attractive than other regions for foreign investors. The results show that a higher return on capital, openness, and good quality of infrastructure promotes foreign direct investment (FDI) in LLDCs in Central Asia. However, a decline in corruption has a positive effect on FDI, while regulatory quality and degree of business freedom have insignificant impacts on investment. Remarkably, political instability, corporate tax rate, and inflation have a positive impact on FDI. LLDCs in Central Asia are likely to have a weak and inefficient decision-making process, which would eventually attract investors trying to seize opportunities. These results reveal that political instability, a high corporate tax rate, and a high inflation rate do not always lead to less FDI flow.

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Notes

  1. 1.

    World Bank. (2018). World Development Indicators, [Online] Available from: https://datacatalog.worldbank.org/dataset/world-development-indicators

  2. 2.

    According to the United Nations Conference on Trade and Development (UNCTAD), 32 countries belong to the group of LLDCs: 16 are located in Africa, 12 in Asia, 2 in Latin America, and 2 in Central and Eastern Europe. LLDCs face special trade and development challenges arising from their lack of territorial access to the sea and geographical remoteness from international markets.

  3. 3.

    A landlocked country is defined as “one that does not have open access to the sea” (Raballand, 2003, p. 521).

  4. 4.

    GFICA Index—A Global Foreign Direct Investment Country Attractiveness Index. [Online] Available from: http://www.fdiattractiveness.com/ranking-2017/

  5. 5.

    There are four different types of FDI (UNCTAD, 2005): natural resource-seeking FDI, market-seeking FDI, efficiency-seeking FDI, and strategic-asset FDI.

  6. 6.

    Business freedom index, [Online] Available from: https://www.heritage.org/index/business-freedom

  7. 7.

    The factors are starting a business (procedures, time, cost, minimum capital), obtaining a business (procedures, time, cost), and closing a business (time, cost, recovery rate).

  8. 8.

    KKZL indexes describe various aspects of the political and governance structures of a broad cross-section of countries, including measures of political instability, rule of law, graft, regulatory burden, voice and political freedom, and government effectiveness. Using an unobserved components model, the KKZL indexes have been estimated by employing 31 different qualitative indicators from 13 different sources, including BERI, DRI/McGraw Hill, the Heritage Foundation, the World Bank, the World Economic Forum, and the Economist Intelligence Unit. Thus, they are in a sense meta-indexes, encompassing many of the various measures used in previous studies. Aggregate indicators drawn from a variety of sources should provide more precise measures of governance than individual indicators do. A further advantage is that these measures are available for an unusually large sample of countries (between 145 and 158). Thus, I contend that the KKZL indexes are superior to other indexes used in empirical studies thus far.

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Authors and Affiliations

  1. Business School, National University of Mongolia, Ulaanbaatar, Mongolia

    Nomintsetseg Ulzii-Ochir

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  1. Nomintsetseg Ulzii-Ochir
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Editors and Affiliations

  1. School of Accounting, Economics & Finance, University of Wollongong, Wollongong, NSW, Australia

    Kankesu Jayanthakumaran

  2. School of Information, Systems and Modelling, Faculty of Engineering and Information Technology, University of Technology Sydney, Sydney, NSW, Australia

    Nagesh Shukla

  3. School of Accounting, Economics & Finance, University of Wollongong, Wollongong, NSW, Australia

    Charles Harvie

  4. UN House, International Think Tank for LLDCs, Ulaanbaatar, Mongolia

    Odbayar Erdenetsogt

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Ulzii-Ochir, N. (2019). The Determinants of FDI in Landlocked Developing Countries in Central Asia. In: Jayanthakumaran, K., Shukla, N., Harvie, C., Erdenetsogt, O. (eds) Trade Logistics in Landlocked and Resource Cursed Asian Countries . Palgrave Macmillan, Singapore. https://doi.org/10.1007/978-981-13-6814-1_5

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  • DOI: https://doi.org/10.1007/978-981-13-6814-1_5

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