An Examination Of The Country Liquidity Index To Predict A Country's Foreign Direct Investment

Foreign direct investment (FDI) is critical to the economic development of any nation regardless of its level of growth. There is a plethora of research on the determining factors of FDI, both economic and non-economic, but very little on the weighted influence of these factors. This research is an attempt to categorize and rank the major determinates of FDI. The conclusion reached by this research is that economic condition of a country is a major determining factor for FDI, but there are other competing factors, as well, that have major impact on FDI. Using the Country Liquidity Index (CLI) as a barometer, the FDI is regressed to develop a model to predict the potential FDI of a country. Results conclude that only 22.46% of a country's FDI is explained by economic factors leaving the remaining 77.54% unexplained. This research attempts to explain the unexplained factors and rank the countries as overinvested and underinvested. A review of the data for the over and underinvested countries indicates that political factors and third country influences may outweigh economic factors when it comes to FDI. The paper concludes with a ranking of 62 countries and their foreign direct investment potential along with their current over/under foreign direct investments.