Flow of Foreign Direct Investment in Developing Countries: A Two-part Econometric Modelling Approach

Abstract

The developing countries of the world have in general been recipients of both official and private financial flows over the last four decades. Understandably so, since in most of these countries, the level of domestic savings is generally very low, the financial sector is widely underdeveloped and in most cases repressed, and therefore the capacity to harness domestic financial resources for sustainable development of the key sectors of the economy is quite limited.A wide body of literature has investigated the role that the flow of external financing could play in the development of recipient countries. The convergence of opinion seems to be that on the balance, there is a net positive relationship between external financial assistance and economic performance of countries, particularly if and when such assistance is accompanied by conducive policy environment (Burnside and Dollar 2000). This may have in some way informed the UN General Assembly, which after adopting the international development goals (IDG) in September 2000, also conceded that the mobilization of external financial resources is essential to the attainment of the goals. An important component of the IDG is the commitment of governments to reduce by one half, the incidence of absolute poverty, which is more pronounced in the developing countries of the world by 2015. According to UN (2002: 5),