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Does good governance matter for FDI? New evidence from emerging countries using a static and dynamic panel gravity model approach

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  • Moheddine Younsi
  • Marwa Bechtini

Abstract

This paper assesses the impact of institutional factors on foreign direct investment (FDI) attractiveness using a pool of 25 emerging host countries (ECs) for the period 1996–2012. In particular, the paper aims to examine whether higher institutional quality and good governance do improve FDI attractiveness, and thereby to identify which institutional factors are the main drivers of FDI in ECs. Using a static and dynamic panel gravity model with various estimation techniques, we find that FDI is positively and significantly influenced by political stability, government effectiveness and regulatory quality. The remaining set of governance indicators is found to be statistically significant and negatively linked to FDI. Our findings also show that factors like a larger GDP per capita difference between investing partner and ECs, higher degree of trade openness and better infrastructure have positive and significant effects on FDI attractiveness. These results have important policy implications for ECs. Fostering FDI inflows into these countries requires policymakers to improve the quality of their institutions and business climate through implementing sound economic policies and regulations.

Suggested Citation

  • Moheddine Younsi & Marwa Bechtini, 2019. "Does good governance matter for FDI? New evidence from emerging countries using a static and dynamic panel gravity model approach," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 27(3), pages 841-860, July.
    • Handle: RePEc:wly:ectrin:v:27:y:2019:i:3:p:841-860
    DOI: 10.1111/ecot.12224
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    Cited by:

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    6. Guojian Hu & Luyao Wei & Yuqi Lu, 2022. "Separation between firms’ headquarters and domiciles: an intraprovincial cross-city analysis," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 68(2), pages 407-428, April.
    7. Jelena Zvezdanoviæ Lobanova & Mikhail Lobanov & Milan, 2021. "Governance and civil and political rights as FDI determinants in transition countries," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 39(1), pages 59-86.
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