Institutional Quality and FDI Inflows: A Study of Long and Short-Term Effects in Bangladesh

Abstract

This study examines the short and long-term effects of institutional quality on foreign direct investment (FDI) in Bangladesh from 1995 to 2020, utilizing the autoregressive distributed lag (ARDL) cointegration approach. The ARDL bound test results confirm a long-term relationship between institutional quality and FDI inflows. Findings indicate that political institutional quality has a significant negative effect on FDI in the long term, while in the short term, it exerts a positive influence. Conversely, economic institutional quality shows a favorable long-term effect on FDI, but its short-term impact is negative. The results highlight the pivotal role of institutional quality in shaping FDI inflows, with trade openness also displaying a strong positive influence in both the short and long run. The study suggests that to enhance economic growth through FDI, Bangladesh should prioritize improving institutional quality. These findings lend robust support to North’s (1990) institutional hypothesis, underscoring the importance of institutional frameworks in fostering a favorable environment for FDI.

Keywords: Institutional quality, Foreign direct investment, ARDL approach, Bangladesh.

DOI: 10.7176/JESD/16-7-02

Publication date: October 31^st 2025