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Foreign direct investment and institutional stability: who drives whom?

Author

Listed:
  • Mahmood, Nihal

    (International Centre for Education in Islamic Finance, Kuala Lumpur, Malaysia)

  • Hassan, Mohammad

    (Taylor’s University, Subang Jaya, Malaysia)

  • Mustapha, Ishaq

    (International Centre for Education in Islamic Finance, Kuala Lumpur, Malaysia)

  • Tasnia, Mashiyat

    (International Islamic University Malaysia, Kuala Lumpur, Malaysia)

Abstract

Purpose – The purpose of this paper is to examine the relationship between foreign direct investment (FDI) flows and institutional stability. The focus country is Canada. It is one of the few countries where the economy remained relatively stable compared to other economies during the Global Financial Crisis. It is crucial for Canada to determine the optimal level of institutional development to attract more FDI and sustain the sound financial stability in future. Design/methodology/approach – This study uses the auto-regressive distributive lag (ARDL) approach to understand the relationship between FDI and institutional stability along with other controlled variables, for instance, gross national product, inflation and exports. Findings – The key finding of this work is that FDI and institutional stability are cointegrated in the long run. The error correction model of ARDL shed light on institutional stability being an exogenous variable, and FDI is an endogenous variable. Institutional stability affects FDI, as it is exogenous. The findings will help policymakers to implement policies to strengthen the institution’s settings, and this, in turn, will attract more investment. Originality/value – Based on previous theoretical and empirical literature, most of the research points to FDI positively affect institutional stability. In some cases, the relationship does not always hold true. This study will fix the gap in the literature by investigating the relationship between FDI and institutional stability of Canada.

Suggested Citation

  • Mahmood, Nihal & Hassan, Mohammad & Mustapha, Ishaq & Tasnia, Mashiyat, 2019. "Foreign direct investment and institutional stability: who drives whom?," Journal of Economics, Finance and Administrative Science, Universidad ESAN, vol. 24(47), pages 145-156.
    • Handle: RePEc:ris:joefas:0142
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    Citations

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    Cited by:

    1. James Temitope Dada & Ezekiel Olamide Abanikanda, 2022. "The moderating effect of institutions in foreign direct investment led growth hypothesis in Nigeria," Economic Change and Restructuring, Springer, vol. 55(2), pages 903-929, May.
    2. Óscar Afonso & Ana Rita Longras, 2022. "Corruption, institutional quality, and offshoring: How do they affect comparative advantage, inter‐country wage inequality, and economic growth?," Metroeconomica, Wiley Blackwell, vol. 73(4), pages 987-1020, November.
    3. Afonso, Oscar & Bandeira, Ana Maria & Lima, Pedro G., 2022. "Growth and welfare effects of corruption penalties," Economic Systems, Elsevier, vol. 46(3).
    4. Omer Ali Ibrahim & Sonal Devesh & Mughees Shaukat, 2022. "Institutional determinants of FDI in Oman: Causality analysis framework," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 4183-4195, October.

    More about this item

    Keywords

    FDI; Foreign direct investment; ARDL; Economic growth; Institutional stability;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises

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