Institutional Quality and Foreign Direct Investment Inflows: Evidence from Cross-country Data with Policy Implication

Abstract

Purpose: The study examines the impact of institutional quality on Foreign Direct Investment (FDI) inflows for emerging economies from South Asiain the period 2002-2016. Other economic factors such as globalisation, financial development, and GDP are also considered. Design/Methodology/Approach: The study uses Im-Pesaran-Shin (IPS) panel unit root test to check stationarity property. It uses cross dependency (CD) and cross-sectional augments IPS tests to check cross-sectional dependency and heterogeneity across the group countries. Next, it uses panel ARDL-PMG tests to check the existence of long-relationship among variables. Then, we apply the panel Granger causality test to check the direction of causality. Finally, for the robustness of results, we use the Pedroni co-integration technique. Findings: The study finds the existence of a long-run relationship between institutional quality and FDI inflows. Other economic factors such as globalization and financial development show long-run and strong causality with FDI inflows. However, the short-run unidirectional causality from institutional quality to FDI inflows is not found for all the countries. Finally, institutional quality strongly causes FDI inflows provided paired with either globalisation or financial development. Practical Implications: Institutional quality increases the FDI inflows. Therefore, policymakers should focus on institutional quality along with globalization and financial development for higher inflows of FDI in emerging countries. Originality/Value: The study considers institutional quality as one of the inputs for FDI inflows in selected emerging economies from South Asia. Further, it creates an institutional quality index for the emerging countries to examine the impact on FDI inflows.

Foreign Direct Investment, Institutional Quality and Sustainability: Cross-country Analysis Using Different Estimators

“…Government effectiveness is showing a mixed result. Our results are in line with those of Gani (2007), Masron and Abdullah (2010), Buchanan et al (2012), Dang (2013) and Behera (2020).…”

Identifying Combinations of Individual Governance Indicators Essential for Attracting International Capital Flows to Asian Economies

“…This means that overall governance enhances the impact of FDI on economic growth. Behera et al (2020) found the existence of a long-run relationship between governance indicators and FDI inflows for South Asian countries.…”

“…The studies on governance environment as a pull factor that influences capital inflow are prevalent and the results seem conclusive and consistent with conventional wisdom that improvement in governance quality attracts capital inflow. For example, many studies found that governance quality affects aggregate capital flows (Alvarez, 2015;Biro, Erdey, Gall, & Markus, 2019;Khan, Khan, Jan, Jandan, & Khan, 2019;Wijethunga & Dayaratne, 2018;Wu, Li, & Selover, 2012); some provide evidence that governance quality attracts portfolio investment and FDI (Behera, Mishra, Priyadarshini, & Satpathy, 2020;Bouchoucha & Yahyaoui, 2019;Gok & Dogru, 2016;Layla et al, 2020;Sabir, Rafique, & Abbas, 2019;Yakubu, 2020). However, the studies that identify a set of essential individual governance indicators that attract capital flows are rare.…”

Regulatory Quality, Rule of Law and Foreign Direct Investment Inflows: Evidence from the Economic Community of West African States

“…Adegboye, Osabohien, Olokoyo, Matthew and Adediran (2020) revealed that institutional quality affected the FDI inflows in sub-Saharan Africa. In another cross-country paper for South Asia, Behera, Mishra, Priyadarshini and Satpathy (2020) showed that institutional quality led to FDI inflows when combined with either financial development or globalization. Jurčić, Franc and Barišić (2020) found that in Croatia, institutional quality variables such as control of corruption, political stability, regulatory quality, the rule of law and government effectiveness were not relevant in attracting FDI inflows.…”