This paper investigates the determinants of FDI inflows to emerging market economies, concentrating on the effects of economic policies. The empirical analysis also addresses the role of external push factors and of political stability using a domestic conflict events database. The results suggest that lowering corporate tax rates and trade tariffs, adopting fixed or managed exchange rate policies and eliminating FDI-related capital controls have played an important role. Domestic conflict events and political instability are found to have significant negative effects on FDI, which highlights the role of inclusive policies to promote growth and avoid sudden stops of FDI inflows. FDI has increasingly been viewed by policymakers in developing and emerging market economies (EMEs) as a tool to finance development, increase productivity, and import new technologies.

In addition, the relative stability of FDI inflows constitutes a buffer against sharp reversals in portfolio inflows during periods of crisis, such as the one experienced in 2009. The global financial crisis marked the end of a significant inflow episode to EMEs. An important policy question is, therefore, which factors (external and domestic) are important in driving FDI inflows to EMEs. In this paper, we look at this question, studying both the country-specific and the global factors that explain FDI in EMEs. The focus of the analysis is on the effects of policy-driven variables, controlling for other factors such as the global economic environment. The data sample includes 46 countries and covers the period from1990to2009for most of them, offering useful time-series variation in inflows for individual countries and EMEs as a whole. The sample also captures the global economic crisis and hence offers a preliminary assessment of the effects of the crisis on FDI inflows to EMEs.