Does Institution Affect the Inflow of FDI? A Panel Data Analysis of Developed and Developing Countries

Abstract

The objective of this paper is to study the institutional impact on the net FDI inflow along with the other possible determinants of Foreign Direct Investment (FDI) in 40 countries comprising of developing and developed countries over the period of 1990-2010 by using panel econometric model. The dependent variable of our study is log of net FDI inflows measured at current US million dollars of different countries in different points in time and independent variables are log of GDP measured at current US dollars, total trade as a share of GDP, gross fixed capital formation as a share of GDP, inflation as measured by consumer price index (annual %) and log of composite index for infrastructure and a number of institutional variables such as investment profile, law and order and bureaucratic quality. According to the econometric results, the coefficients of log of GDP, trade to GDP ratio, gross fixed capital formation (% GDP), and log of composite index for infrastructure and institutional variables are positive and significant but coefficient of inflation (%, CPI) is negative and significant. Moreover, the institutional variables-investment profile and law and order have positive effect on FDI and bureaucratic quality has negative effect and also statistically significant.

Institutional determinants of FDI in Oman: Causality analysis framework

“…The findings of this study confirm the results of Sabir et al (2019), Mihaela et al (2018), Bailey (2018) Mallik and Chowdhury (2017), Siddica and Angkur (2017), Kurul and Yalta (2017) that control of corruption and adhering to the rule of law influence FDI positively, and a strict enforcement of property rights ensures safety and security of the foreign investments (Ayappan & Chin, 2018; Hossain, 2016; Cleeve (2008). The study also supports the claims of Sabir et al (2019), Kurul and Yalta (2017), Al Shubiri (2016), Mohamed and Sidiropoulos (2010), Cleeve (2008), Gani (2007) on the importance of fiscal freedom and government effectiveness and the claims of Sabir et al, 2019, Hossain (2016), Sánchez‐Martín et al (2014), Omanwa (2013) and Ines (2013) on the importance of trade freedom and openness in stimulating FDI.…”

“…Aziz (2018) demonstrated that the institutional quality variables of economic freedom, ease of doing business and international country risk (ICRG) have a positive and significant impact on FDI inflows in Arab economies. Siddica and Angkur (2017) studied the inflow of FDI in 40 countries comprising developing and developed countries over the period of 1990-2010, using a composite institutional index. The study found that investment profile and law and order have a positive effect on FDI, while bureaucratic quality has a negative effect.…”

FDI and Institutions in BRIC and CIVETS Countries: An Empirical Investigation

“…Similarly, Mason and Vracheva (2017) concluded that in 50 developed and developing countries during 1996-2012, inflation had a negative influence on FDI inflows, and anti-inflation policies increased the recipient countries' attractiveness; however, according to the researchers, the attractiveness of antiinflation measures was mostly higher for developed countries. A negative impact of inflation on FDI inflows was also observed by Siddica and Angkur (2017) in 40 developed and developing economies from 1990 to 2010 and Gupta and Singh (2016). Therefore, inflation is used as an independent variable in order to consider the host economies' price unpredictability, macroeconomic stability and risk.…”

An Empirical Analysis of Institutional Quality and Foreign Direct Investment Inflows in Nigeria

“…Studies have shown that countries with strong institutional quality attract more foreign direct investment (FDI) than countries with weak institutional quality (Buchanan, Le & Rishi, 2012;Siddica & Angkur, 2017;Peres et al, 2018). North (1990) postulated that institutions are human-made limitations in form of political, economic and social interactions that reduce uncertainty and allow firms and individual to interact efficiently.…”