What Robustly determines Foreign Direct Investment? Addressing Data Mining Issue

What determines Foreign Direct Investment (FDI) inflows remains a primary concern of economists and policy makers; yet the uncertainty surrounding FDI theories and empirical approaches has created ambiguity regarding the determinants of FDI. It is a common practice in the fields of economics and finance to report the most “appealing” or convenient regression or regressions after an extensive search and data mining, given that the “true” model is unknown. This paper applies traditional Extreme Bounds Analysis (EBA) as well as the Sala-i-Martin modified form of EBA to identify the robust determinants of FDI using cross-sectional data (averaged for the period of 1985-2016) covering 103 developing countries. We consider 33 potential economic, political and institutional determinants. The results show that all variables of interest are fragile determinants of FDI when using traditional EBA. Yet, when applying the Sala-i-Martin EBA, nine robust variables are revealed. Some policy implications are discussed