An analysis of foreign direct investments: inflows and determinants : a study of the nordic and baltic countries

Abstract

It is more important to analyze foreign direct investments (FDI) than ever before, due to its growth effects and importance to the country‘s economy. During the last century it could be noticed huge changes in world’s economy, where very important role is given to various forms of capital movement across different countries. One of the most important tasks for a countries’ economic policy has become to attract FDI. Thus, for this and many other reasons FDI plays a significant role in the development of international trade and establishment of direct, stable and usually long-lasting links between different economies. In addition to this, the whole world FDI inflows are highly influenced by world economy conditions – when overall economy grows, then FDI inflows grows and this is reversed when the economy is in decline. In the theory section I show that the most important FDI determinants are economical conditions and stability, transportation costs, government politics, patents, property rights, market imperfection, lower risk and favorable competition, market size, labor force and production costs. My analysis showed that these determinants have strong influence for attracting FDI. The most significant relation is between FDI inflows and tax wedge on labor costs, number of granted patents, all and active population, expenditures on R&D. Moreover, in Finland, political and business environment have largest impact on inwards FDI, in Sweden – demographical and business environment, and in Norway – economical environment. Economical, political and business environment has strongest positive influence for attracting FDI in Estonia, while demographical determinants play most significant role in Latvia and Lithuania.