Is Digitalization a Pull Factor for Foreign Direct Investment?

The boom in digitalization post-2010 gained further momentum post-covid-19. Against this background, the paper is trying to gauge whether the extent of digitalization of a country is a pull factor for Foreign Direct Investment (FDI). In the literature review, the paper identifies five channels: productivity channel, startup channel, information channel, trade channel, and ease of scalability channel through which digitalization may attract FDI to the host country. Using panel data techniques over a cross-section of 40 countries, we evaluate the effect of higher digitalization along with the longstanding traditional determinants of FDI in this paper. The paper finds that digitalization as proxied by smartphone penetration and individuals using internet as percentage of population have positive and significant effect on FDI inflows in dynamic panel specification. In this light, the paper has important policy implications for furthering digital penetration and building digital infrastructure to bring in a virtuous cycle of investment and productivity.