Does institutional stability granger-cause foreign direct investment? evidence from Canada

Global FDIs have increased substantially since the 1990’s. This was seen as a favorable development among developing countries, however developed countries have had a mixed reaction. In this paper we look at the effects of FDI flows on institutional stability, to better understand what drives FDI. The focus country for this paper is Canada, as it is one of the few countries where the economy remained relatively stable compared to other economies during the global financial crisis. As such, the findings from this study can shed light on what allowed Canadian policy makers to maintain economic stability. The methodology applied is Auto-Regressive Distributive Lag (ARDL) to understand the relationship between FDI and institutional stability along with other controlled variables (GNP, inflation, and exports). This study is different from others in that it examines the Canadian economy, and similar papers have examined different countries (to my knowledge). Based on previous theoretical and empirical literature, most of the research points to FDI positively affecting institutional stability. However, there is some literature that makes the case for this relationship not always holding true. Our empirical findings tend to show that it is in fact institutional stability that positively impacts FDI in the long run. As such, the policy makers should consider implementing policies that ensure that the strength of institutions is enhanced, and this in turn will attract more investment.