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Do Institutions Matter for Foreign Direct Investment?

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  • Fathi Ali

    ()

  • Norbert Fiess
  • Ronald MacDonald

Abstract

In this paper the role of institutions in determining foreign direct investment (FDI) is investigated using a large panel of 107 countries during 1981 and 2005. We find that institutions are a robust predictor of FDI and that the most significant institutional aspects are linked to propriety rights, the rule of law and expropriation risk. Using a novel data set, we also study the impact of institutions on FDI at the sectoral level. We find that institutions do not have a significant impact on FDI in the primary sector but that institutional quality matters for FDI in manufacturing and particularly in services. We also provide policy implications for institutional reform.
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Suggested Citation

  • Fathi Ali & Norbert Fiess & Ronald MacDonald, 2010. "Do Institutions Matter for Foreign Direct Investment?," Open Economies Review, Springer, vol. 21(2), pages 201-219, April.
  • Handle: RePEc:kap:openec:v:21:y:2010:i:2:p:201-219
    DOI: 10.1007/s11079-010-9170-4
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    File URL: http://hdl.handle.net/10.1007/s11079-010-9170-4
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    Keywords

    Foreign direct investment; Institutions; Sectoral FDI; F3; F4;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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