Digitalization's divergent impact on FDI inflows: A comparative analysis between advanced and developing countries

Abstract

Digital technology in host countries serves as a significant comparative advantage in attracting FDI inflows. Does digitalization affect FDI inflows in different ways between advanced and developing countries? To unravel this question, we employ broadband subscriptions and Internet users as proxies for digitalization, examining their influence on FDI inflows across 37 advanced and 100 developing countries from 2002 through 2022. The two-step difference GMM Arellano-Bond and PMG estimators are applied to control endogeneity and serial autocorrelation. The findings present intriguing insights: First, digitalization and institutional quality emerge as magnets for FDI inflows in developing economies, while exerting deterrent effects in advanced countries. Second, market size increases FDI inflows in advanced economies, but decreases them in developing countries. Third, across advanced and developing countries, trade openness and infrastructure positively influence FDI inflows, whereas inflation is a hindrance. These revelations underscore essential policy implications for the governments of both advanced and developing countries. Policymakers may need to tailor strategies to harness the benefits of digitalization for FDI attraction, taking into account the distinct economic contexts and challenges faced by each group of countries.