Host Country Degree of Rurality and the Location Choice of Multinational Enterprises: A Panel Model Analysis

In this paper, we build up the literature by introducing host-country degree of rurality as a factor influencing Multinational Enterprises’ (MNEs) location choice measured by foreign direct investment (FDI) inflows. Based on 1999-2007 panel data of 172 countries, we show that host-country degree of rurality has a negative relationship with the location choice of multinationals. The effect is more profound in low-income host countries than in high-income host countries. We also confirm that the control variables, such as host-country market size, trade openness, labor costs, and labor skills are positively related to FDI inflows while interest rates and expected currency depreciation are negatively related. Moreover, results of pair-wise Granger causality tests show FDI has a feedback relationship with per capital GDP and exchange rate movements. Impulse response test results render key insights into FDI linkages and associated policy implications.