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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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    Citations

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    Cited by:

    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. 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.
    3. 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).
    4. 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.
    5. 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.
    6. 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).
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    11. 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).
    12. 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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