How government spending matters to FDI inflows in developing countries?

This study explores the effect of government spending on FDI inflows in developing country groups by different level of development. The United Nations’ country classification by income level is used to classify country level of development. The study covers a sample of 100 developing countries worldwide over the 2002-2022 period. Applying different estimation techniques, the findings reveal a declining relationship between government spending and FDI inflows along the rise in country level of development. The low income country group has the largest positive effect of government spending on FDI inflows and the effect decreases in the lower-middle income, the upper-middle income and finally it turns to be negative in the high income country group. Policy implications are derived that at lower level of development, larger size of government spending may attract inward FDI but as country level of development rises, FDI inflows favor smaller size of government spending.