Institutional Quality and Foreign Direct Investment: Global Evidence

Institutional quality and good governance are considered important in attracting foreign direct investment (FDI) to determine the role of the institutional quality and governance as an incentive for FDI inflow. It is arbitrary to link institutions and economic growth as attractive indicators of FDI inflow in different countries. This study uses a two-step system GMM model and examines the impact of institutional quality on FDI in the global panel, developed, developing, and Asian countries from 2002 to 2019. The results suggest that only regulatory quality significantly increases FDI inflow while other institutional indicators along the institutional quality index are negatively associated with FDI inflow in the global panel. In case of developed countries, control of corruption and regulatory quality negatively affect FDI inflow while all other indicators have no effect on FDI inflow. In case of developing countries, control of corruption, political stability, and voice and accountability significantly attract FDI inflow, while government effectiveness, regulatory quality, political system, and institutional quality index significantly reduce FDI inflow. In case of Asian countries, all institutional quality indicators have a significant and positive effect on FDI inflows, except the control of corruption, which reduces FDI inflow. The results of this study have significant policy implications for the countries in the sample in the context of institutional quality indicators and FDI inflow.