Do Good Institutions and Economic Uncertainty Matter to Foreign Direct Investment?

Abstract

This study investigates the effects of institutional quality, economic policy uncertainty and other key fundamental factors on foreign direct investment (FDI) inflows for a sample of 22 economies from 2000 to 2019. First, the quality of institutional infrastructure in the host country matter greatly to FDI inflows. Second, a subservient increase in the Economic Policy Uncertainty (EPU) growth rates adversely affects FDI inflows. Additionally, we found that macroeconomic fundamentals pertaining to the level of financial openness, exchange rate stability and financial development in the host country are of great importance to FDI inflows. In essence, the findings from our study suggest that the improvement of macroeconomic fundamentals in conjunction with robust and strong institutional infrastructure can contribute to the moderation of economic policy uncertainty, which deters FDI inflows.Contribution/Originality: This study contributes significantly to the growing literature on determinants of FDI inflows by examining the critical roles of institutions, economic policy uncertainty and other key decisive factors in FDI decisions by applying the dynamic panel data estimations proposed by Kripfganz (2017) as a distinct methodology alongside the two-step GMM system proposed by Blundell & Bond (1998) on a wider selection of countries.