Innovation and foreign direct investment attraction in developing countries

The present study investigates the relationship between innovation (INN) and foreign direct investment (FDI) attraction across 66 developing countries from 2013 to 2021. Adopting the Difference Generalized Method of Moments estimation, the study reveals a statistically positive INN-FDI nexus. Panel Granger causality analysis further indicates a bidirectional between the two variables. Additionally, via feature importance analysis, it is evident that market size, labor resources, and financial development play a critical role in strongly influencing FDI inflows, while innovation shows smaller magnitude. Furthermore, trade openness demonstrates a significantly positive impact on FDI with low impact, while inflation has an insignificantly negative effect on FDI. Policy implications are also discussed. Developing countries, particularly those seeking to attract foreign direct investment (FDI), consider paying attention to the innovation (INN) factor. Alongside traditional factors such as market size and abundant labor force are strengths of FDI attraction for developing countries, new models should be continually developed. In this context, the researcher hypothesizes that multinational enterprises are interested in new resources related to INN to meet their production requirements. Indeed, INN and its efficacy in attracting FDI in developing countries, which pay less resources to allocate innovation, remains unproven. Drawing upon data from the global innovation index, the experimental findings of this research show the bidirectional FDI-INN nexus and suggest that policies aimed at attracting FDI should prioritize those based on advanced technologies. Additionally, via feature importance analysis, market size and labor force cannot be ignored in the analyzed context.