The South Pacific island countries (SPICs) for the past two decades have been lagging behind in growth in comparison to similarly placed island countries in the Caribbean and Indian Ocean regions. One of the reasons behind poor growth in SPICs has been attributed to poor domestic investment climate, resulting in low inflows of foreign direct investment (FDI) as well. The paper seeks to undertake an empirical study of determinants of FDI in Fiji, as a case study. The study establishes that the rate of growth, market size, openness policy and real exchange rate are crucial determinants of FDI inflows into Fiji’s economy. The Granger non-causality test based on Vector Error Correction Model shows that there is bi-directional causal linkage between FDI and economic growth. The policy conclusion is that Fiji should adopt an appropriate policy environment and implement measures for encouraging the growth inducing FDI inflows.
