State Fragility and Foreign Direct Investment: The Mediating Roles of Human Flight and Economic Decline

Developing countries view foreign direct investment (FDI) as a vital contributor to economic growth by augmenting domestic capital and enhancing efficiency through transfer of new technology, marketing, and management skills. Even though the factors that influence FDI have been examined in the context of developing countries, the role of state fragility has been underexplored in the literature. Drawing on institutional theory, we develop hypotheses on the link between state fragility and inward FDI. Based on data from 93 fragile countries from different geographical areas, the study shows the influence of state fragility on human flight and brain drain and the role of the latter in causing economic decline. It also explores the mediating roles of human flight and economic decline in the relationship between state fragility and inward FDI flows and identifies economic decline as an important path linking state fragility and FDI.