ABSTRACTThis study analyzes determinants of net foreign direct investment (FDI) inflows in emergingeconomies between 1978 and 1995. Its theoretical framework is based on the concept ofInstitutional FDI Fitness, developed by the author Saskia Wilhelms. Grounded in integrativetheories of foreign direct investment (FDI), the Institutional FDI Fitness theory stipulates that FDI isdetermined less by intransigent fundamentals than by institutional variables more amenable tochange, namely policies, laws, and their implementation. The four institutions contributing to FDIFitness are government, markets, education, and socioculture.The FDI Fitness concept is tested in an econometric cross-section across 67 emerging economies.The econometric analysis shows government and market variables as the most significantdeterminants of FDI inflows. Governmental fitness is reflected in economic openness with onlyminimal trade and exchange rate controls. Government fitness also means a strong rule of law andlow corruption, based on legal and administrative equity and transparency. Market fitness isrepresented by high trade volume, low taxes, high urbanization, and ready availability of credit andenergy.Given that these determinants reduce incentives for discretionary behavior and rent-seeking, theresults demonstrate that, while investors are willing to negotiate, they seek stability andtransparency, preferring clear-cut and consistently implemented regulations to individual privilegesgained through wheeling and dealing.The regression analysis hence corroborates the Institutional FDI Fitness theory. The manner inwhich policy-makers handle institutions, policies, laws, and their implementation is significantlymore important to foreign direct investors than relatively intransigent factors such as population sizeand socioculture. The FDI Institutional Fitness theory suggests that every nation has the opportunity to identify and expand its competitive strengths to increase its share of global foreign direct investment.

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