This paper empirically analyses the determinants of foreign direct investment inflows into the Russian regions. This problem has become highly relevant for the necessary modernization of the Russian economy after the recent economic slowdown and sharp decrease in budget revenues. The authors model foreign direct investment flows with the use of the gravity approach according to which investment flows are positively correlated with the size of the investor’s country as well as the size of the recipient region and are negatively correlated with the distance between investor and recipient. The empirical analysis is based on a constructed database consisting of the foreign direct investment flows from 179 investor countries into 78 Russian regions for the period 2006–2013. The authors apply the Poisson Pseudo Maximum Likelihood method and identify the following factors determining foreign direct investment inflows into the Russian economy: the gross domestic product of the investor’s country, the gross domestic product per capita in the recipient region, the distance from the investor to Moscow, the openness of the region, the economic situation in the region, the innovative capacity of the region and the foreign direct investment of the previous period. Interestingly, the distance from the recipient region to Moscow matters for the regions in the western part of Russia (relatively close to Moscow) but is not significant for the regions in the eastern part (remote regions).

Permanent inflow of foreign direct investment is a powerful driver of economic development in developing countries. However, the country’s underdeveloped institutional environment imposes additional costs on the investors. We identified the specificity of the institutional environment’s impact on attracting foreign direct investment (FDI) in developing countries with different levels of economic development. Based on the heterogeneity of the studied countries, we hypothesised that in developing countries institutions become an active determinant of FDI after exceeding a certain threshold. In other words, institutional factors do not affect FDI inflows into relatively underdeveloped countries among a group of developing countries whose level of economic development does not exceed the threshold. To test this hypothesis, we simulated an intra-group economic modelling based on the data of the World Bank, the Heritage Foundation and the For Peace Foundation for the period from 2005 to 2015. The main tool of econometric analysis was a panel regression with fixed effects at the country level and a two-step least squares method with instrumental variables. We used indices of economic freedom and the state insolvency as aggregated indicators of the non-overlapping groups of institutional factors. The study’s main results have confirmed the hypothesis that institutional factors affect FDI inflows only in the countries where gross national income per capita is higher than average. Moreover, we defined the threshold value of gross national income per capita that a country needs to achieve in order to make any institutional changes to enhance FDI inflows. Thus , government policies , aimed a t increasing the developing countries ’ attractiveness for foreign investors, should firstly take into account the level of economic development of the recipient country.

In the Russian economy, foreign direct investments (FDI) are distributed very unevenly between the regions. This inequality is caused by differences in the regions’ economic characteristics, as well as by varying effectiveness of regional policies to attract FDI. The assessment of a region’s potential to attract FDI could serve as a guide for analysing the effectiveness of local authorities in terms of creating a positive environment for foreign investors. The research focuses on constructing and assessing an econometric model of FDI determinants at the regional level. The theoretical foundation for this model is a gravity approach. We used estimates obtained with the help of Poisson’s method of quasi-maximum likelihood estimation for calculating the potential of foreign direct investments. Using the data for the period from 2015 to 2017, we identified the crucial factors influencing the inflow of foreign direct investment in Russia at the regional level: availability of the workforce, level of bureaucracy, level of income, population density, and the financial results of the regional companies. Based on the calculated potentials, we identified successful and lagging Russian regions in terms of FDI inflows. We analysed and systemised the volume of FDI inflows as well as the ratio of actual/potential FDI of the Russian regions. The largest Russian regions in terms of FDI inflows have limitations in growth because they either exceed their potential level already (Moscow oblast, Krasnodar krai, Samara oblast) or are close to it (Moscow city, Leningrad oblast, Saint-Petersburg city). At the same time, more than a half of the Russian regions (41 out of analysed 82) not only have very low potential to attract FDI inflows, but also operate at a level lower than potential. A significant increase in FDI inflows across the country may be provided by a small group of regions with medium and high levels of FDI inflows but with considerable unrealized potential. This group includes such regions as Republic of Bashkortostan, Republic of Tatarstan, Sverdlovsk oblast, Udmurt republic, KhMAO–Yugra, Orenburg oblast, and Belgorod oblast. The suggested methodology for assessing a region’s FDI potential and comparing it with actual FDI inflows can be used for goal setting for relevant regional authorities and subsequent control of their efforts to attract FDI.