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The impact of institutional quality on foreign direct investment inflows: evidence for developed and developing countries

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  • Mihaela Peres
  • Waqar Ameer
  • Helian Xu

Abstract

This study examines the impact of institutional quality on foreign direct investment (F.D.I.) by categorising the countries as developed or developing. We measured institutional quality by the sum of control of corruption and rule of law indicators. We provide evidence that institutional quality positively and significantly impacts F.D.I. in developed countries; specifically, we find that a one standard deviation change in governance significantly affects F.D.I. by a factor of 0.2225 (using common law and the lagged values of the independent variables as instruments). Ceteris paribus, the results for the developing countries demonstrate that the institutional quality impact is insignificant because of the weak structure of institutions. Result findings strongly support the significance of governance indicators in attracting F.D.I. inflows. From our results, we infer that the relevance of governance indicators tends to be a key point in attracting F.D.I. inflows.

Suggested Citation

  • Mihaela Peres & Waqar Ameer & Helian Xu, 2018. "The impact of institutional quality on foreign direct investment inflows: evidence for developed and developing countries," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 31(1), pages 626-644, January.
    • Handle: RePEc:taf:reroxx:v:31:y:2018:i:1:p:626-644
    DOI: 10.1080/1331677X.2018.1438906
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    1. Oualid MECHTI & Khadija EL ISSAOUI, 2024. "Impact of institutional quality on foreign capital invested in Africa [Impact de la qualité institutionnelle sur les capitaux étrangers investis en Afrique]," Post-Print hal-04698139, HAL.
    2. Xi Chen & Binyi Liu & Vincent Tawiah & Abdulrasheed Zakari, 2024. "Greening African economy: The role of Chinese investment and trade," Sustainable Development, John Wiley & Sons, Ltd., vol. 32(1), pages 1001-1012, February.
    3. Edouard Mien, 2023. "Aperçu statistique et littérature empirique sur les investissements directs à l’étranger dans les pays en développement WP326," Working Papers hal-04123976, HAL.
    4. Tan, Man & Yang, Dengyu & Yang, Qijing, 2023. "Institutional quality, asset specificity, and foreign direct investment," Journal of International Money and Finance, Elsevier, vol. 134(C).
    5. Mohamed Ali Labidi & Anis Ochi & Yosra Saidi, 2024. "Relationship Analysis Between FDI and Economic Growth in African Countries: Does Governance Quality Matter?," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(4), pages 16511-16540, December.
    6. Tolulope Osinubi & Titus Ojeyinka, 2022. "On the Nonlinear Effects of Globalization on Poverty: Insights from African Countries," Emerging Economy Studies, International Management Institute, vol. 8(2), pages 135-157, November.
    7. Yosra Saidi & Anis Ochi & Samir Maktouf, 2023. "FDI inflows, economic growth, and governance quality trilogy in developing countries: A panel VAR analysis," Bulletin of Economic Research, Wiley Blackwell, vol. 75(2), pages 426-449, April.
    8. Lingduo Jiang & Shuangshuang Liu & Guofeng Zhang, 2023. "The effect of bilateral currency swap agreements on foreign capital inflows: Evidence from China," Southern Economic Journal, John Wiley & Sons, vol. 90(2), pages 444-473, October.
    9. Huo, Chunhui & Hameed, Javaria & Albasher, Gadah & Pang, Ming, 2023. "The impact of institutional quality, natural resources, and finance-growth on China's economic recovery: An empirical study," Resources Policy, Elsevier, vol. 83(C).
    10. Emre Gokceli, 2023. "Institutional Quality and Foreign Direct Investment: Evidence from OECD Countries," Journal of Economics / Ekonomicky casopis, Institute of Economic Research, Slovak Academy of Sciences, vol. 71(3), pages 222-257, March.
    11. Muhammad Ramzan & Hong Li, 2025. "An analytical framework to link factors affecting agricultural trade intensity in the world: pathways to sustainable agricultural development 2030 agenda," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 27(1), pages 1223-1272, January.
    12. Osarumwense Osabuohien-Irabor & Igor Mikhailovich Drapkin, 2024. "The spillover effects of outward FDI on environmental sustainability in developing countries: exploring the channels of home country institutions and human capital," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 26(8), pages 20597-20627, August.
    13. Shreya Pal & Mantu Kumar Mahalik, 2024. "Determinants of Financial Development in Top and Bottom Remittances and FDI Inflows Recipient Developing Regions—How Does Institutional Quality Matter?," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(4), pages 17108-17139, December.
    14. Bogdan Nichifor & Luminita Zait & Ovidiu Turcu, 2025. "Renewable Investments, Environmental Spending, and Emissions in Eastern Europe: A Spatial-Economic Analysis of Management and Policy Decisions Efficiency," Sustainability, MDPI, vol. 17(7), pages 1-33, March.
    15. Nvuh‐Njoya Youssouf & Keneck‐Massil Joseph & Yogo Urbain Thierry, 2024. "Constitutional instability and foreign direct investment in Africa," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 32(1), pages 3-23, January.
    16. Byrka-Kita Katarzyna & Czerwiński Mateusz & Bajerska Aurelia, 2023. "Does deterioration in rule of law per se create or destroy value?," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 59(4), pages 277-296, December.
    17. Thu‐Ha Thi An & Kuo‐Chun Yeh, 2023. "Determinants of Taiwan's outward investment in Southeast Asia: Economic factors and institutional issues," Pacific Economic Review, Wiley Blackwell, vol. 28(4), pages 465-502, October.
    18. Brahim Bergougui & Syed Mansoob Murshed, 2023. "A sectoral analysis of institutional quality and foreign direct investment in Mena countries: does sector type matter?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 159(4), pages 987-1012, November.
    19. Bouzayani RAJAB & Abida ZOUHEIR, 2024. "Complementarity between private capital flows and the development of regulatory institutions:Empirical evidence for North African countries," Romanian Journal of Economics, Institute of National Economy, vol. 59(2(68)), pages 192-205, December.
    20. Jin, Guangzhu & Huang, Zhenhui, 2023. "Asymmetric influence of China's outward FDI and exports on trade-adjusted resources footprint in belt and road node countries: Moderating role of governance," Resources Policy, Elsevier, vol. 82(C).
    21. Edouard Mien, 2023. "Statistical Overview and Empirical Literature on Foreign Direct Investment in Developing Countries WP326," Working Papers hal-04123985, HAL.

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