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The Quality Of Institutions And Foreign Direct Investment

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  • CHRISTIAN DAUDE
  • ERNESTO STEIN

Abstract

Using bilateral foreign direct investment (FDI) stocks around the world, we explore the importance of a wide range of institutional variables as determinants of the location of FDI. While we find that better institutions have overall a positive and economically significant effect on FDI, some institutional aspects matter more than others do. Especially, the unpredictability of laws, regulations and policies, excessive regulatory burden, government instability and lack of commitment play a major role in deterring FDI. For example, the effect of a one standard deviation improvement in the regulatory quality of the host country increases FDI by a factor of around 2. These results are robust to different specifications, estimation methods, and institutional variables. We also present evidence on the significance of institutions as a determinant of FDI over time.

Suggested Citation

  • Christian Daude & Ernesto Stein, 2007. "The Quality Of Institutions And Foreign Direct Investment," Economics and Politics, Wiley Blackwell, vol. 19(3), pages 317-344, November.
    • Handle: RePEc:bla:ecopol:v:19:y:2007:i:3:p:317-344
    DOI: 10.1111/j.1468-0343.2007.00318.x
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