Growth Effects of FDI Inflows, Financial Development and Institutional Quality in Emerging Economies: A Panel Quantile Regression Approach

The present study aims to examine the growth effects of FDI inflows, financial development, and institutional quality in emerging economies. The research covers 24 years of panel data of 33 selected emerging economies for the period spanning from 1996 to 2020. The Pedroni and Westerlund panel cointegration tests were performed to ascertain a long run relationship among the studied variables while the panel quantile regression approach was applied to account for the heterogeneous effect of the exogenous variables on economic growth. The study revealed among other things that FDI inflows, financial development and institutional quality all have positive effects on economic growth in the selected emerging economies. It further revealed that the growth effects of these explanatory variables are evidently heterogeneous. The implications of this study include the need to increase FDI inflows, especially environmentally-friendly FDIs, establish a well-developed financial sector and improve institutional quality so as to accelerate growth in the selected emerging economies. This paper contributes to extant literature by answering the question of whether the growth effects of FDI inflows, financial development and institutional quality can differ in sign and or magnitude depending on the performance of a country’s growth. The findings of this study may help governments and policy makers to develop very good growth promoting policies in accordance with the behavior of productivity growth.