Countries need a tremendous amount of investment to utilize existing resources and enhance productivity in order to ensure inclusive growth in the economy. Foreign Direct Investment (FDI) by providing the required investment can fulfil the saving-investment gap. The paper makes an empirical investigation of the effectiveness of FDI as a financing tool for inclusive growth. The study also examines how the effectiveness of FDI varies across economies with varying level of institutional quality. The results suggest that FDI plays a significant role in achieving inclusive growth, especially in economies with a low and medium level of institutional Quality. A deep underpinning of our inclusive growth variable brought thoughtful insights such as low and middle-income economies, which mostly belong to the low and medium level of institutional quality cluster. They should adopt policies that enhance the existing spectrum of opportunities. Whereas equity should be the top-most priority for high-income economies.

This research conducts an empirical investigation to identify the relationship between institutional quality and inclusive growth. For this purpose, it first examines the existing situation of inclusive growth and institutional quality of 86 countries. Later, it constructs indices of inclusive growth using social welfare function and institutional quality by apply principal component methodology on worldwide governance indicators. The fixed effect results suggest that Institutional quality is a major driver for achieving growth inclusiveness. A deep underpinning of the institutional variable indicates that inclusive growth is positively affected by the quality of economic and political institutions, while the effect of legal institutions was found insignificant. Furthermore, cross country evaluation of inclusive growth presented few thoughtful insights such as; in low income and lower income economies inclusive growth can be achieved by increasing the overall opportunities. Whereas, middle and high income economies need to enhance the equity prospects of opportunities to attain growth inclusiveness. This study by highlighting the role of institutional quality majorly contributes in existing set of literature of growth inclusiveness. It suggests that improved quality of institutions (rule of law, reduced corruption, regulatory quality, securing property rights and effective governance) can help in extending the opportunities to the unprivileged segment of the society, ensuring long term growth.