The effects of information technology achievement and diffusion on foreign direct investment

Foreign direct investment (FDI) and the new information and communications technology (ICT) have gained significant grounds in many parts of the world in somewhat parallel fashion. The objective of this paper is to assess the proposition that the level of technological achievement and diffusion is a determining factor in attracting FDI in high-income countries. A sample of technologically advanced countries was chosen on the basis of the technological achievement index (TAI). Cross-country data for the period of 1994 to 1998 were used to estimate a fixed effects model. The empirical results obtained provide strong evidence that technology diffusion of new instruments or ICT, such as mobile phones and Internet hosts, are major pull factors of FDI. The results also provide evidence that robust economic environment, low unit cost, and high degree of openness are other essential determinants of FDI. We conclude that in order to retain and attract FDI, countries should create opportunities for useful innovations to be created and diffused, as well as maintain flexible, competitive and dynamic economic environments. The main policy implication for countries lagging in terms of attracting foreign investment is to build on reforms that emphasize creation and diffusion of ideas and products, as well as maintain a high degree of openness to new investors, especially in ICT.