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Foreign direct investment and institutional quality: Some empirical evidence

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  • Buchanan, Bonnie G.
  • Le, Quan V.
  • Rishi, Meenakshi
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    Abstract

    Based on a panel data analysis of 164 countries from 1996 to 2006, we examine the impact of institutional quality on foreign direct investment (FDI) levels and volatility. We find that good institutional quality matters to FDI. We provide evidence that institutional quality has a positive and significant effect on FDI. More specifically, we find that a one standard deviation change in institutional quality improves FDI by a factor of 1.69. Ceteris paribus, institutional quality is negatively and significantly associated with FDI volatility which may have an adverse effect on economic growth per Lensink and Morrisey (2006). Thus, our results suggest that if there are institutional determinants of FDI volatility and if such volatility is associated with lower economic growth, then the usual policy prescription of attracting FDI into countries by offering the “correct” macroeconomic environment would be ineffective without an equal emphasis on institutional reform.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 21 (2012)
    Issue (Month): C ()
    Pages: 81-89

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    Handle: RePEc:eee:finana:v:21:y:2012:i:c:p:81-89

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    Web page: http://www.elsevier.com/locate/inca/620166

    Related research

    Keywords: Institutions; Corporate governance; FDI;

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    Cited by:
    1. Unbreen Qayyum & Hasan Siftain, 2014. "Governance and the Effectiveness of Foreign Capital," PIDE-Working Papers 2014:98, Pakistan Institute of Development Economics.
    2. Daly, Kevin & Vo, Xuan Vinh, 2013. "The determinants of home bias puzzle in equity portfolio investment in Australia," International Review of Financial Analysis, Elsevier, vol. 27(C), pages 34-42.
    3. Akpan Uduak & Isihak Salisu & Asongu Simplice, 2014. "Determinants of Foreign Direct Investment in Fast-Growing Economies: A Study of BRICS and MINT," Working Papers 14/002, African Governance and Development Institute..
    4. JUDE, Cristina & LEVIEUGE, Gregory, 2013. "Growth effect of FDI in developing economies: The role of institutional quality," MPRA Paper 49321, University Library of Munich, Germany.
    5. Amendolagine, Vito & Boly, Amadou & Coniglio, Nicola Daniele & Prota, Francesco & Seric, Adnan, 2013. "FDI and Local Linkages in Developing Countries: Evidence from Sub-Saharan Africa," World Development, Elsevier, vol. 50(C), pages 41-56.

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