Explainable AI for Foreign Direct Investment Analysis: Evidence from Central Asia
Foreign direct investment (FDI) is an important factor in the economic development of Central Asian countries, where investment flows have traditionally been concentrated in resource-based sectors. In the context of a growing focus on diversification, the need to analyze and study the determinants of FDI is increasing.
This study examines the determinants of FDI inflows in Central Asian countries using machine learning methods (CatBoost) and explainable artificial intelligence (SHAP), and compares the results with a classical econometric approach based on a two-way fixed effects (TWFE) model. Given the limited availability of data, a transfer learning approach is applied: the model is first trained on a group of countries structurally similar to Central Asia and then fine-tuned on the regional sample.
The results show that key macroeconomic factors such as Trade (% of GDP), Current account balance (% of GDP), and several other macroeconomic variables remain significant across both methodologies. At the same time, ML identifies additional regional patterns, such as a higher importance for FDI of determinants including Adjusted savings: carbon dioxide damage (% of GNI), Urban population (% of total population), and Access to electricity (% of population), among others.
The findings indicate that XAI provides interpretable results that are consistent with classical methods and additionally allows for capturing nonlinearities and regional heterogeneity. The study extends the application of ML and XAI in data-constrained Central Asian settings and demonstrates the value of combining econometric and machine learning approaches in the analysis of FDI determinants.