Foreign direct investment and local interpretable model-agnostic explanations: a rational framework for FDI decision making

Abstract

Purpose: This study aims to examine foreign direct investment (FDI) factors and develops a rational framework for FDI inflow in Western European countries such as France, Germany, the Netherlands, Switzerland, Belgium and Austria. Design/methodology/approach: Data for this study were collected from the World development indicators (WDI) database from 1995 to 2018. Factors such as economic growth, pollution, trade, domestic capital investment, gross value-added and the financial stability of the country that influence FDI decisions were selected through empirical literature. A framework was developed using interpretable machine learning (IML), decision trees and three-stage least squares simultaneous equation methods for FDI inflow in Western Europe. Findings: The findings of this study show that there is a difference between the most important and trusted factors for FDI inflow. Additionally, this study shows that machine learning (ML) models can perform better than conventional linear regression models. Research limitations/implications: This research has several limitations. Ideally, classification accuracies should be higher, and the current scope of this research is limited to examining the performance of FDI determinants within Western Europe. Practical implications: Through this framework, the national government can understand how investors make their capital allocation decisions in their country. The framework developed in this study can help policymakers better understand the rationality of FDI inflows. Originality/value: An IML framework has not been developed in prior studies to analyze FDI inflows. Additionally, the author demonstrates the applicability of the IML framework for estimating FDI inflows in Western Europe.