Determinants of Foreign Direct Investment in Iran: An Empirical Study Using Structural Equation Modeling

This paper examines the determinants of foreign direct investment (FDI) in Iran by applying the structural equation modelling (SEM). Using the annual time series data for the 1991-2006 period, two models were developed. In the first model the correlation between 12 determining factors and FDI in Iran were analyzed and in the second model the 12 factors were fit into five categories of determinants namely: Business, Economic, Infrastructural, Oil and Science and Technology and the impact of each of the mentioned groups of factors was investigated. The results derived through the first model indicated that openness of trade and Gross Domestic Product (GDP) per capita have a significant positive impact on FDI in Iran, while along with inflation, oil extraction and production had a surprisingly negative correlation with FDI. The results also suggested that infrastructural factors pertaining to telecommunications in addition to market size, research and development (R&D), education and the scientific output encourage FDI inflows in Iran. The second model output estimates revealed that the business factors promote FDI most and interestingly once more the oil factor proved to have a negative impact on the FDI inflows to Iran.