The role of innovation as an FDI location factor using panel data: does economic development stage matter?

This study investigates the impact of the Global Innovation Index (GII) on FDI inflows across 81 countries from 2013 to 2021, highlighting that the effect of innovation varies significantly across stages of economic development. In particular, the same improvement in innovation capacity generates markedly different FDI responses depending on whether countries are high-, upper-middle-, or lower-middle-income economies. The results indicate that GII positively and significantly impacts FDI across all income groups, though the magnitude varies: a 1-point increase in the GII boosts FDI by 0.009% in high-income countries, 0.028% in upper-middle-income countries, and 0.072% in lower-middle-income countries. However, the effect in lower-middle-income countries is not robust across specifications, indicating that the innovation effect on FDI is conditional rather than universal. These findings suggest that innovation is a stronger driver of FDI in emerging economies, while in advanced economies, mature innovation systems yield smaller marginal effects.