Industries and foreign direct investment: Evidence worldwide and by groups of countries

Abstract

The objective of this research is to examine the relationship between industries and foreign direct investment, both globally and by groups of countries. Panel data from 112 countries compiled by the World Bank (2017) were used, for the period 1987-2015. The countries were classified into six groups according to income levels, using the World Bank's Atlas Method as a reference. The argument behind this classification is that the strength of the relationship between the two variables differs according to the income levels of the countries. In order to fulfill this purpose, different tests were used to verify the equilibrium relationship in the long and short term existing between the variables. Thus, the evidence indicates that there is no relationship in the short term, however, in the long term there is a relationship between foreign direct investment and industries. Finally, when carrying out the causality test, it was found that in extremely high-income countries and low-income countries there is a unidirectional causality that goes from industries to foreign direct investment. In lower-middle-income countries, there is one-way causality from foreign direct investment to industries. It is recommended in developing countries to apply policies aimed at attracting foreign direct investment in order to boost the economy, mainly in the sectors most affected by the pandemic.