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Do Institutions Matter for Foreign Direct Investment?

  • Fathi Ali
  • Norbert Fiess
  • Ronald MacDonald

In this paper the role of institutions in determining foreign direct investment (FDI) is investigated using a large panel of 107 countries during 1981 and 2005. We find that institutions are a robust predictor of FDI and that the most significant institutional aspects are linked to propriety rights, the rule of law and expropriation risk. Using a novel data set, we also study the impact of institutions on FDI at the sectoral level. We find that institutions do not have a significant impact on FDI in the primary sector but that institutional quality matters for FDI in manufacturing and particularly in services. We also provide policy implications for institutional reform.

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2008_26.

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Date of creation: Jul 2008
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Handle: RePEc:gla:glaewp:2008_26
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