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ut political risk in host countries. As a result FDI flows would be less responsive to political risk too. If every country’s risk fell simultaneously, every country’s share would be predicted to rise, which is impossible since they add up to one. It

was also related to depressed stock market sentiments and

business cycles, both of which led to a massive decline in

M&A investments especially in the developed countries

(UNCTAD, 2007).

Political risk was assessed by the International Country Risk Guide (ICRG) index published by the Political Risk Services Group. It is published yearly and based on experts’ opinions.

The key point in using this index is that it can be used by firms to evaluate country risk. It is therefore a very good proxy of the information and beliefs of firms that want to invest

Abroad. The index ranges from 0 to 100, the latter corresponding to the lowest possible risk. To simplify the interpretation of the results, we re-coded the index so that an increase reflects higher risk (i.e., we multiplied it by _1). We therefore expect our ICRG index to be negatively related to FDI. Control variables are standard. We thus first control for the

Relative size of each country, which is measured by the ratio of that country’s GDP to the world’s GDP in percentage. We expect this control variable to be mechanically positively related to a country’s share in world FDI flows. MEON (2008)

The second control variable assesses country i’s level of economic development, measured by the per capita income in thousands of USD. An increase in per capita income being associated with higher purchasing power, it is likely to attract more FDI. At the same time, however, this variable may also proxy wages. Since wages are larger in richer countries, GDP per capita may then be negatively related to FDI flows, if their motivation is to seek cheap labour. Determining the sign of that variable is therefore an empirical matter. Third, we control for GDP growth in percentage. Faster GDP growth suggests that the economy is dynamic, and may attract more FDI. GDP growth should, therefore, correlate positively with a country’s FDI share.

The next control variable is openness to trade, defined as the percentage of country i’s exports plus imports to that country’s GDP. Countries that are more open to trade are also expected to be more open to foreign investments. We therefore expect this variable to exhibit a positive sign. The last control variable takes infrastructure quality into account. It is the number of telephone lines per 100 inhabitants. As foreign investment is known to be sensitive to infrastructure quality, we expect this variable to be positively related to a country’s share in world FDI flows.

As i discuss the various trends in FDI both on a global or regional base, i will focus on the magnitudes as well as the nature of the flows as a fraction share of different regions of the world .

In 2005/06, developing East Asia accounted for over two thirds of the total constituent trade of developing countries. Developing countries, accounted for over 70% of the spreading out in the global mechanism of trade during 1992/93–2006/7. Many factors emerge to explain this.

First, although fast economic growth, manufacturing income in many of the region’s econom